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US Federal Reserve raises interest rates amid banking crisis

However, the Federal Reserve had called the present banking system "sound and resilient"

US Federal Reserve raises interest rates amid banking crisis

Amid the banking turmoil, the United States (US) Federal Reserve increased its key rate by 0.25 percentage points.

The hikes in the interest rates since last year has led to strains in the banking system leading to even collapse.

However, the Federal Reserve had called the present banking system "sound and resilient".

It has also warned that the recent bank failures could hurt the economic growth in the months ahead.

In a bid to stabilise the prices, the Fed has been raising borrowing costs.

Due to the higher interest rates, Silicon Valley Bank and Signature Bank collapsed this month.

There are also concerns about value of bonds held by banks as rising interest rates may make those bonds less valuable, reported sources.

Banks tends to hold large portfolios of bonds and as a result are sitting on significant potential losses, it added.

European Central Bank also raised its key interest rate by 0.5 percentage points last week.

Federal Reserve chairman Jerome Powell said the Fed remained focused on its inflation fight.

Meanwhile, the recent hikes made the stocks to slip. The S&P 500 was 0.4% lower in afternoon trading on Wednesday.

The Dow Jones Industrial Average was up down 181 points, or 0.6%, at 32,378, as of 3:06 p.m. Eastern time, while the Nasdaq composite was 0.2% lower.

In the latest set of projections released by the Fed, median forecast had the federal funds rate at 5.1% at the end of this year.

The yield on the two-year Treasury, which tends to track expectations for the Fed, tumbled to 3.99% from 4.13% just before the projections were released.

It was above 5% earlier this week, and a drop that size for the bond market is a massive one, reported Associated Press (AP).

Though the Fed had indicated that they are not going to further hike the interest rates after the banking crisis, they had reversed their decision.

Just a few weeks ago, much of Wall Street was convinced the Fed would pick up the pace on rate hikes given how strong inflation has remained and the tough talk Fed officials were giving about it, reported sources.

Higher rates could increase the risk of recession as well. The bond investments fell in price too due to the recent hikes.

Powell said that such a pullback in lending could act almost like a rate hike on its own. And that was one of the reasons the Fed opted to raise by only 0.25 points instead of 0.50 points.

Markets around the world have suffered this month on worries the banking system may be cracking under the pressure of much higher rates.

Some strength was found after U.S. Treasury Secretary Janet Yellen indicated that the government may back depositors at more weakened banks if the system is at risk.

That could mean making sure even customers with more than the $250,000 limit insured by the Federal Deposit Insurance Corp. can get all their money. Across the Atlantic, regulators also pushed a deal for one Swiss banking giant to buy its troubled rival, reported sources.

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