NASHVILLE, Tenn. (WKRN) — The Federal Reserve has decided to raise its short-term borrowing rate another quarter percent, despite concerns that previous rate increases helped trigger the nation’s banking crisis.
Silicon Valley Bank (SVB), the country’s 16th largest bank, collapsed in early March. A few days later, Signature Bank, the 29th-largest bank in the U.S., closed its doors, followed by many bank stocks plummeting in early trading.
With SVB’s collapse, the government quickly took over, which Professor David Maslar at the University of Tennessee said was appropriate and likely reduced the risk for widespread implications.
He said the large investments in SVB bring their own risks and should not spark fear in Tennessee residents who keep their savings in mid-size and small, community banks. He is concerned that if there is fear among the public and a slowdown in lending, implications could lead to a recession.
“I think reassuring individuals they do not need to be pulling their money out of midsize banks to be able to move towards those larger institutions is a perfectly warranted thing,” said Maslar. “The FDIC insurance is in place and it allows for insurance on any account that is insured and is less than $250,000.”
A ripple effect of the bank crisis, Maslar warned to keep an eye on the Federal Reserve for the potential interest rate increase.
While this decision intensifies the central bank’s fight against inflation, a quick rise in interest rates tanked the value of bonds at Silicon Valley Bank contributing to its collapse. Now, a study shows nearly 190 banks are at risk of collapse with high-interest rates and declining asset values.
In a statement, the federal reserve rejected concerns about their financial system. “The U.S. banking system is sound and resilient,” the central bank said.
Maslar said there are still some risks involved for the public.
“The idea that the value of your current assets is going to incline when interest rates increase, your existing portfolio and you haven’t taken that into consideration, that is definitely a real risk that you face,” said Maslar.
Even though inflation has fallen significantly from a peak this summer, it’s still more than triple the Federal Reserve’s target of 2 percent.
If the reserve decided not to raise the interest rate, economists say it could have allowed high prices to persist and hurt household budgets.