WASHINGTON (Reuters) - The U.S. Federal Reserve on Wednesday raised interest rates for the ninth consecutive time since the start of last year, choosing to continue its campaign against high inflation despite pressure in the banking industry after two U.S. banks collapsed over the past two weeks. Why was this decision taken?

Fed members voted unanimously to raise the benchmark interest rate by a quarter of a percentage point (0.25%) to nearly 5%, making it more expensive for people seeking auto or mortgage loans, or who are going into debt on their credit cards.

This decision reflected the convictions of the members of the interest rate committee, which still believes that higher interest rates may be necessary to restore price stability and reduce inflation.


Inflation vs. Banking Sector Stability

Some observers had urged the Fed to pause rate hikes, at least temporarily, in order to assess the fallout from the collapse of Silicon Valley Bank (SVB) and Signature Bank earlier this month, while other banks, including First Republic, saw large withdrawals of deposits.

But tensions in the banking system appear to have eased in recent days, with Treasury Secretary Janet Yellen saying Tuesday in Senate testimony that "large withdrawals from regional banks have stabilized and the U.S. banking system is healthy and resilient."

Meanwhile, consumer prices continue to rise, but at lower rates than during the second half of last year.

Annual inflation in February was 6 percent, down from 9.1 percent in June, but still well above the Fed's 2 percent target.

Fed Chairman Jerome Powell said in his press briefing yesterday that he and his colleagues are fully aware that "high inflation poses great difficulties because it erodes the purchasing power of citizens, especially those who are less able to meet the high cost of necessities such as food, housing and transportation."

On the other hand, the Fed is conducting an extensive investigation into bank failures, and Powell did not mind yesterday the participation of independent bodies in the investigations or conducting independent investigations.

The bank will report to Congress by May 100, and Powell comments that "it is <>% certain that there will be independent investigations, when a bank fails, and of course we welcome that."

Growing recession fears

Sherif Osman, an economist at Poise Investment – said in an interview with Al Jazeera Net – "It was very difficult not to raise interest rates to calm the banking sector (because that) is at the expense of ongoing efforts to fight inflation, which seems to be a top priority for the Central Bank at this moment."

He added that not raising the interest rate would have been understood as fear and warned of the consequences of raising the interest rate, so the hike was low by a quarter of a percent, which reflected the Fed's confidence in the stability of the US market despite the crisis it has been witnessing for two weeks.

The Fed is counting on other banks to be more conservative about providing loans after seeing the collapse of Silicon Valley and Signature, which in turn will tighten credit conditions for personal and corporate loans, and affect economic activity and employment, which will contribute to controlling inflation rates.

Higher interest rates have traditionally slowed economic growth, but this leaves the United States at risk of pushing the economy into recession.

However, Fed policymakers do not expect a recession, with the US economy expected to grow by 0.4% this year.