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Fed Debated Pause amid Banking Crisis, Inflation Drove March Rate Hike

Federal Reserve policymakers were close to pausing rate hikes last month due to the banking crisis. However, high inflation and strong economic growth led to further monetary policy tightening, as revealed by the minutes of the Fed's March meeting on Wednesday.


FOMC Raised Benchmark Rate Amid Banking Woes

On Mar. 22, the Federal Open Market Committee (FOMC) raised its benchmark rate by 0.25% to 4.75% to 5.00% despite market debates about a possible pause to assess the fallout from banking issues at home and abroad.

U.S. Government and Fed Restore Confidence in Banking System

The U.S. government and Fed intervened to boost confidence in the banking system, easing concerns about contagion resulting from the collapse of Silicon Valley Bank, Signature Bank, and troubles with Credit Suisse.

Inflation Pressure Supports Further Rate Hikes

Ongoing inflation pressure and easing worries about banking contagion helped tilt the scale in favor of additional hikes. Fed participants deliberated extensively on whether to pause rate hikes during their March meeting.

Steeper Rate Hike Considered Without Banking Crisis

In the absence of the banking crisis, a 50-basis-point rate hike was considered due to persistently high inflation and strong economic growth, as indicated by the minutes from the March meeting.

Fed Forecasts Peak Rate of 5.1% in 2023

The Fed maintained its benchmark rate forecast from December, projecting a peak rate of 5.1% in 2023. This implies at least one more hike to move monetary policy into restrictive territory.

Traders Anticipate Rate Hike in May

About 60% of traders expect the Fed to hike rates at its May 3 meeting, according to's Fed Rate Monitor Tool, with cuts also anticipated before year-end.

Jerome Powell
Jerome Powell

Powell Addresses Possibility of Rate Cuts

Fed Chairman Jerome Powell dismissed the notion of rate cuts, stating they were not "baseline expectations." However, he acknowledged that further tightening in lending conditions could substitute for rate hikes.

Banking Sector Influences Fed's Monetary Policy

The minutes reveal that the banking sector developments have influenced the Fed's thinking on monetary policy, causing many participants to lower their assessments of the federal funds rate target range.

Mild Recession Predicted Due to Banking-sector Issues

The Fed's economic outlook was dampened by the potential effects of the recent banking-sector developments, with the staff's projection at the time of the March meeting including a mild recession starting later this year.