US Fed Raises Rates to Highest Since 2007, Dollar Falls as Bank Deposits Remain Uninsured

US Federal Reserve raises interest rates to 4.75%-5% and Dollar falls as central bank signals one more hike

By Ahmed Azzam | @3zzamous | 23 March 2023

  • Fed raises rates to 4.75%-5%, highest since 2007 due to inflation.

  • Dollar falls as Fed hints at just one more rate hike.

  • Treasury Secretary Yellen rules out blanket insurance for bank deposits, raising worries about the banking crisis.

  • Bank of England and Bank of Switzerland expected to tighten policy with interest rate hikes.

What’s happened in the markets?

The US Federal Reserve raised the fed funds rate to a range of 4.75% to 5% in March 2023, matching the previous increase in February. This move, which was in line with investor expectations, has led to borrowing costs reaching their highest level since 2007 due to elevated inflation. Some investors believed that the central bank should have paused its tightening cycle to maintain financial stability, but the Fed noted that the US banking system is resilient. The decision is expected to result in tighter credit conditions for households and businesses, potentially weighing on economic activity, hiring, and inflation. The Fed projects that the fed funds rate will reach 5.1% this year and end 2024 slightly higher at 4.3%. PCE inflation forecasts were raised for this year to 3.3%, but kept steady at 2.5% for 2024. The economy is projected to grow slightly less in 2023 and next year compared to earlier projections. The dollar index fell below 102 following the announcement.

What to watch?

Treasury Secretary Janet Yellen has ruled out a "blanket insurance" for bank deposits, sparking renewed concerns about the banking crisis. As investors brace for weekly jobless claims and new home sales data in the US on Thursday, the Bank of England is set to tighten policy in response to hotter-than-expected inflation in the UK. The Bank of England may increase rates by 25 basis points to 4.25% after inflation figures surged above 10%. The Bank of Switzerland is expected to raise interest rates by 50 basis points to 1.50%.