The US Federal Reserve on Wednesday decided to raise the federal funds rate by 25 basis points, modest compared to previous hikes. This hike takes the target rate to the 4.75-5 per cent range, the highest since the start of the recession in September 2007.
The move comes amid uncertainty about the banking system which has taken a hit in the last few weeks triggering fears of a larger problem and aims to curb inflation.
The Federal Open Market Committee said in the statement, "The Committee will closely monitor incoming information and assess the implications for monetary policy."
The central bank has committed to bringing down the inflation to 2 per cent from currently over 6 per cent.
"The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments", the statement added.
In the press conference after the announcement of the decision, Fed chair Jerome Powell said, since the last meeting, economic data has come in stronger than expected. However, he added that projections are not a plan, the path will adjust as appropriate.
On further rate hikes, Powell said that in assessing the need for further hikes, Fed will particularly be focused on the actual, expected effects of credit tightening.
According to a Bloomberg report, Powell said, "We are committed to restoring price stability, and all of the evidence says that the public has confidence that we will do so...It is important that we sustain that confidence with our actions as well as our words."
The collapse of the Silicon Valley Bank and issues at another bank due to rising interest rates, among other factors, led to speculation that the Fed might not raise the interest rate at the conclusion of its two-day meeting this week. And that it will pause its fight against inflation to assess the situation.
How Global Markets Reacted
Wall Street stocks plunged on Wednesday as the US Federal Reserve continued hiking interest rates to fight inflation while noting that banking sector turmoil could weigh on the economy. Previously, the market rose after financial authorities moved to prevent contagion in the banking sector, following the collapse of three US regional lenders this month.
After the Fed announcement, the three main US stock indices fell as investors processed the statement that went along with it and Chair Jerome Powell's subsequent Q&A session.
On the other hand, Fed signals to pause interest rate increases led to a little rise in Asian shares.
Meanwhile, the Rupee strengthened, against the US dollar on Thursday in early trade. Rupee opened at 82.3750 per dollar, its strongest level in a week. The currency ended at 82.6550 on Tuesday.