Fed Hikes Rates Again Tempered by Recent Bank Failures

Amidst turbulence in the banking sector, the Federal Reserve continued today to seek a balance between stemming inflation and risking recession, and potential further disruption in the banking system, raising the benchmark interest rate by a quarter-point.  

Today’s announcement marks the ninth consecutive increase by the Fed and the biggest string of consecutive rate hikes on record. It moves the benchmark rate to between 4.75 and 5 percent. At a press conference following the announcement, Federal Reserve Chair Jerome Powell described the motivation for the quarter-point increase as “getting inflation back down to 2 percent over time.”

“Inflation remains too high,” Chair Powell said. “Without price stability, the economy doesn’t work for anyone.”

The quarter-point increase is significantly lower than the 50-basis-point hike that some analysts predicted immediately after Chair Powell testified before the U.S. Senate Banking Committee on March 7, 2023. Since then, two U.S. banks, including Silicon Valley Bank, collapsed. At today’s press conference, Chair Powell described Silicon Valley Bank as an “outlier,” citing failures by that bank’s management team and said that deposit flows in the banking system have stabilized in the last week.

Before today’s increase, the central bank had already raised interest rates by 4.5 points over the course of eight hikes over the last year. Despite having fallen in February for the eighth-consecutive month, the Consumer Price Index, a measure of inflation, rose 6 percent year over year.

Some had hoped the Fed would skip an interest rate hike today, in light of recent events. The series of rate increases have elevated the cost of consumer and business loans, dampened markets, and heightened the risk of recession. Commercial real estate, in particular, is likely to feel continuing effects—analysts expect loan delinquency rates to continue to climb as a wave of maturities come due over the next two to three years, occupancy rates and property cash flows decline, and traditional capital sources remain constrained.

Chair Powell stated today that the Fed no longer anticipates ongoing rate increases will be appropriate to fight inflation and, instead, that “some additional policy firming may be appropriate.”  It is too early to tell if recent events in the banking sector might contribute to stabilizing prices by tightening credit markets.

At this point, it remains unclear whether tightening credit markets combined with restrictive interest rates and other post-pandemic displacements will tip the entire economy into recession or simply continue to cause rolling distress in specific industries. However, the cumulative effect of the Fed actions to date has been a material increase in commercial chapter 11 bankruptcy filings during the latter part of 2022 and the first quarter of 2023.

Ballard Spahr's multidisciplinary Distressed Assets and Opportunities team is helping clients navigate an economy where the cost of capital is likely to continue to increase and its availability may become further constrained, creating both challenges and opportunities. Please contact us if you have questions or would like to learn more about the team.

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