The Federal Reserve pressed ahead with a quarter-point rate rise on Wednesday despite the recent turmoil in the banking sector but signalled it may soon call time on its monetary tightening campaign.

Following its latest two-day meeting, the Federal Open Market Committee voted to lift the federal funds rate to a new target range of 4.75 per cent to 5 per cent, the highest level since 2007.

In a statement on Wednesday, the FOMC said the US banking system was “sound and resilient” but that there was uncertainty on the extent to which the fallout from the failure of two lenders would hit the economy.

In a strong signal that the US central bank is nearly done with the most aggressive streak of rate rises in decades, members of its policy-setting committee removed the oft-repeated warning that “ongoing increases” would be necessary to bring soaring inflation under control.

Rather, the committee said “some additional policy firming may be appropriate” to bring inflation back to the bank’s 2 per cent target.

The rate rise on Wednesday comes at a time of acute uncertainty over whether the US government has done enough to avert a full-blown crisis stemming from the implosion of Silicon Valley Bank and Signature Bank earlier this month.

In a press conference, Fed chair Jay Powell said the measures taken in response to the failures — including a guarantee for all deposits held at the two lenders and a new Fed lending facility — “demonstrate that all depositors’ savings are safe”.

In a sign of how much the recent bank failures have altered the Fed’s calculus, the debate among officials just weeks ago centred around whether the central bank should accelerate the pace of its rate rises by opting for a half-point increase.

The banking turmoil had prompted the Fed committee to “consider” a pause — that is, no rate rise at all — Powell said, but its members had ultimately decided to press ahead with a quarter-point increase with a “very strong consensus”.

In February the Fed had shifted down to a more traditional quarter-point cadence after implementing a string of large rises last year. But earlier this month, Powell floated the possibility of returning to a half-point rise amid concerns the central bank had not done enough to stamp out inflation.

Following the release of the statement, US stocks initially rose before turning negative after Powell appeared to dismiss suggestions the bank would end up cutting rates this year. The yield on the two-year Treasury dipped, indicating lower expectations of interest rate rises ahead.

“To not hike would have revealed more concerns about the banking system,” said David Page, head of macro research at Axa Investment Management. “The Fed now assumes that credit conditions will tighten to some extent [due to the banking turmoil] and that will ultimately feed through to the economy.”

The decision on Wednesday was accompanied by a revised set of projections for monetary policy until the end of 2025, known as the “dot plot”, as well as forecasts for growth, unemployment and inflation.

Most officials still expect the policy rate to peak at 5 per cent to 5.25 per cent this year and for that level to be maintained until at least 2024. Policymakers pencilled in a series of rate cuts by the end of next year, with the federal funds rate falling back down to 4.3 per cent.

Officials’ forecasts suggest slower growth as well as higher inflation. Growth is set to slow to 0.4 per cent this year before rebounding to 1.2 per cent in 2024 and 1.9 per cent in 2025. The unemployment rate is still forecast to peak at 4.6 per cent next year.

Most policymakers expect the core personal consumption expenditures price index to hover around 3.6 per cent by the end of 2023, before falling to 2.6 per cent in 2024. Both estimates are 0.1 percentage points higher than in December.

In the days leading up to the March meeting, former officials, economists and investors were at odds over how the Fed should proceed, with those in favour of a pause arguing the central bank could further unsettle an already delicate situation by ploughing ahead with another rate rise.

The Fed has come under fire over the recent string of bank failures, facing questions on how closely officials were monitoring regional lenders following a rollback, endorsed by Powell, of the rules governing them.

Michael Barr, who leads supervisory matters at the Fed, said the central bank was conducting a review of how it managed SVB.

On Wednesday, Republican senator Rick Scott of Florida and progressive Democrat Elizabeth Warren of Massachusetts introduced a bipartisan bill that would replace the Fed’s internal investigator with one appointed by the president. Warren has also teamed up with other lawmakers to demand tougher regulation of the banking sector.

Banks in turmoil

The global banking system has been rocked by the collapse of Silicon Valley Bank and Signature Bank and the last minute rescue of Credit Suisse by UBS. Check out the latest analysis and comment here

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