The Federal Reserve on Wednesday raised interest rates by 25 points in what was one of its most critical meetings in recent memory, after policymakers were faced with a banking crisis and elevated inflation.
Wednesday's action from the Fed brings its interest rates to the target range of 4.75 and 5 per cent, about 25 basis points shy of its initial end-of-year projections.
Fed Chairman Jerome Powell suggested this month that policymakers would probably return to aggressive rate rises, but the collapse of Silicon Valley Bank and contagion fears ended that plan.
Speaking for the first time since SVB and Signature's collapse, Mr Powell said the US banking system remained "sound and resilient".
"We believe … that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes," he told reporters.
He said it was too soon to "determine the extent of these effects" and how the Fed would respond to them.
Powell expects 'bumpy' road back to 2 per cent
It was the ninth time the Fed has raised interest rates over the past 12 months in reaction to the US inflation rate, which peaked at 9.1 per cent in June.
But inflation remains elevated at 6 per cent and employers still posted a strong number of job gains in February. Layoffs are not being reported at the pace the Fed would like.
The Personal Consumption Expenditures Price Index — the Fed's preferred inflation gauge — also rose to 5.4 per cent in January. The Labour Department will release February's PCE report at the end of the month.
"The process of getting inflation back down to 2 per cent has a long way to go and is likely to be bumpy," Mr Powell said.
He said the Fed did not expect continuing interest rate increases but instead anticipated "some additional policy firming".
Markets initially rallied after the Fed's quarter-point raise, but slid after Mr Powell suggested the Fed would probably not cut interest rates this year.
The Dow fell 535 points, or 1.63 per cent, as trading closed. The S&P 500 and Nasdaq fell 1.66 per cent and 1.60 per cent.
The Fed's interest rates have begun to affect the housing market, which has already experienced the first year-on-year decrease in home prices in a decade.
The median home price in February was $363,000, a 0.2 per cent decline from February 2022, the National Association of Realtors reported on Tuesday.
Mortgage rates surged to 7 per cent this year after the Fed's interest rate increases, but subsided to about 6 per cent by the end of February.
Mortgage rates today stand at 6.6 per cent, according to mortgage buyer Freddie Mac.
“Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines,” said NAR chief economist Lawrence Yun.
Navigating the banking crisis fallout
All this comes in the face of banking turmoil that rocked the global marketplace over the past two weeks, stoking fears that the world could face a crisis similar to when Washington Mutual failed in 2008.
Silicon Valley Bank collapsed two weeks ago when it sold all of its available-for-sale bonds below market value because of the Fed's interest rates.
Although the bank's failure could mostly be attributed to mismanagement, the Fed's interest rates did play an indirect role in the collapse.
SVB's collapse spawned a tumultuous period in the banking sector as contagion fears seeped into the global market. Regional bank shares in the US tumbled, with First Republic Bank suffering the heaviest losses.
A group of 11 major banks last week deposited $30 billion to shore up the institution, but that did little to calm worried investors.
Those fears extended into Europe, where the slumping Credit Suisse was acquired by Swiss rival UBS in a $3.2 billion takeover.
Mr Powell defended the emergency actions the Fed and other regulators took to protect uninsured depositors at SVB and Signature.
"History has shown that isolated banking problems, if left unaddressed, can undermine confidence in healthy banks and threatened the ability of the banking system as a whole," he said.
"We are committed to learning the lessons from this episode, and to work to prevent episodes from events like this from happening again."
The Fed previously announced that it would conduct a review of SVB's supervision and regulation. Mr Powell agreed that it needed to "strengthen supervision and regulation" of banks.
"At a basic level, Silicon Valley Bank management failed badly," he said.
"They grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, and didn't hedge that risk.
Meanwhile, Treasury Secretary Janet Yellen told politicians on Capitol Hill that regulators had not seen a deposit run like the one SVB had experienced.
Ms Yellen has sought to project calm into the turmoil over the last 12 days, previously telling an audience that the situation is "stabilising".
Fed expects interest rates to hit 5.1 per cent by year's end
In its updated end-of-year economic projections, the Fed projected interest rates would reach 5.1 per cent, unchanged from its December median estimate.
Interest rates are expected to fall to 4.3 per cent by end of 2024 before dipping further to 3.1 per cent in 2025.
The Fed expects PCE inflation to dip to 3.3 per cent by the end of the year, revised slightly higher from their previous 3.1 per cent projection in December. PCE inflation is projected to return near 2 per cent in 2025.
Policymakers expect the US economy to grow by 0.4 per cent, revised down from its December projection of 0.5 per cent. The unemployment rate is projected to rise to 4.5 per cent.