In recent days, most industries have been looking forward to the Federal Reserve System’s (FED) interest rate increase. According to FED estimates, interest rates will increase by 0.5%, ranging from 5 - 5.25%. However, the recent turmoil in the banking sector has overwhelmed the story of monetary policy and caused a lot of uncertainty about the path to raising interest rates. Specifically, the collapse of Silicon Valley Bank and Signature Bank influenced the Fed’s thinking on monetary policy. The reason is that higher interest rates have reduced the value of the bank’s bond holdings, causing the bank to fall into a state of cash scarcity and collapse when massive withdrawals occur. As interest rates rise, borrowing becomes more expensive for banks overall and reduces the value of their investments, including bonds.
At the end of the monetary policy meeting, FED decided to increase interest rates by 0.25%. The range fluctuates at 4.75% - 5%. The Federal Open Market Committee (FOMC) also announced that “it will closely monitor and potentially add some additional policies to get inflation back to 2%”. FED plans to raise interest rates at least once by 0.25% by the end of 2023, but emphasized that it will soon stop raising interest rates.
As a result, the USD dropped sharply after the FED raised interest rates. The unemployment rate is expected to be 4.5% in 2023 and 4.6% in 2024. Excessive monetary tightening policies greatly affect the working class; unemployment and higher interest rates are expected to put a big dent in economic growth next year. In the domestic market, at the end of the trading session on March 22nd, the State Bank announced that the central exchange rate of Vietnamese Dong to USD remained unchanged, currently at 23,617 VND.
Why does the FED still raise interest rates despite the banking crisis?
The FED has long been under pressure to take more action to reduce inflation, and raising interest rates is one of the few tools it can use. Last year, FED raised interest rates as it tried to restrain inflation. Higher interest rates can reduce inflation but also limit economic expansion. Many opinions are like that: FED has gone too far in raising interest rates and believes that inflation is trending in the right direction. Other factors, such as sustained consumer spending and lower unemployment despite higher interest rates, could also influence the FED's decision as it believes the economy can withstand higher interest rates.
