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September 01, 2020 1:28pm
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Fed raises interest rates a quarter point despite recent banking turmoil

The Fed is trying to balance its fight against inflation with a new crisis in the financial sector triggered by the collapse of Silicon Valley Bank earlier in March.

The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a point, forging ahead with its fight against stubborn inflation despite a spate of bank failures and a growing crisis within the financial sector. 

The move puts the key benchmark federal funds rate at a range of 4.75% to 5%, the highest since 2007, from near zero just one year ago. It marks the ninth consecutive rate increase, following a half-point hike in December and four jumbo-sized 75-basis-point hikes before that.

Fed officials are in the midst of the most aggressive tightening campaign since the 1980s as they try to crush inflation that is still running about three times higher than the pre-pandemic average. 

But the stunning implosion of Silicon Valley Bank earlier in March complicated the Fed's efforts, because the rapid rise in interest rates played a direct role in the bank's failures. Increasing interest rates again could exacerbate instability within the financial system. 

Silicon Valley Bank collapsed after a liquidity crunch, forcing a government takeover and raising questions over the fate of nearly $175 billion in customer deposits. It marked the largest U.S. bank failure since the global financial crisis in 2008, and rising interest rates played a pivotal role in SVB's collapse.

SVB COLLAPSE THROWS FED RATE-HIKE DECISION NEXT WEEK INTO UNCERTAINTY

That's because SVB, which largely catered to tech companies, venture capital firms and high-net-worth individuals, saw a huge boom in deposits during the pandemic, with its assets surging from $56 billion in June 2018 to $212 billion in March 2023. The bank responded by investing a large chunk of that cash into long-term U.S. Treasury bonds and other mortgage-backed securities. But when the Fed started rapidly raising interest rates, the value of those securities tumbled.

That coincided with a decline in available funding for startups, which started drawing down more of their money to cover their expenses, forcing the lender to sell part of its bond holds at a steep $1.8 billion loss. When depositors realized that SVB was in a precarious financial situation, a bank run ensued. 

This is a developing story. Please check back for updates.

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