March 20, 2023 — Bank Collapse May Divert Fed’s Interest Rate Plans


A financial crisis was seen to be one way the Fed would put a halt on interest rate increases, and the recent collapse of the Silicon Valley Bank may just be that crisis. Investors are now worrying about how turmoil in the US banking sector could damage the economy, rather than persistent inflation and rising interest rates.

The Fed faced two major problems over the last year: inflation and financial stability fallout. Last week the Fed acted along with the treasury and the Federal Deposit Insurance Corporation to backstop uninsured deposits at the failed bank and to provide more generous funds to other banks to meet demands for withdrawals.

Last week’s news wasn’t all bad. It was reported that inflation eased a bit in February, up 6 percent from a year earlier, down from 6.4 percent in January. This was the smallest increase since September 2021. Core inflation came in at 5.5 percent.

In light of these new developments, some economists are predicting there will be no change in interest rates at this week’s Fed meeting, and that rates will hold until the crisis is deemed to have passed. Others still expect at least a 25 bp increase given a strong labor market and consumer spending. There is a risk that without a rate hike, if the bank crisis passes quickly and the Fed has not acted aggressively, inflation could take off again.