The United States Federal Reserve has announced a minor rate hike against the backdrop of turbulence in the global banking industry.

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U.S. Federal Reserve Board Chair Jerome Powell holds a news conference after the Fed raised interest rates by a quarter of a percentage point following a two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., March 22, 2023.

The German share price index DAX graph is pictured at the Frankfurt stock exchange after risks have climbed to multi-month highs in recent days as concerns over contagion from the collapse of Silicon Valley Bank and instability at European bank Credit Suisse gripped the markets, in Frankfurt, Germany, March 17, 2023

On March 22, the Federal Reserve increased interest rates by 0.25%, but hinted at the possibility of suspending future hikes in borrowing costs due to the recent failure of two American banks.

Jerome Powell, the Chair of the Federal Reserve, aimed to comfort investors regarding the stability of the banking system by stating that while Silicon Valley Bank's management had "failed badly," the bank's collapse did not suggest broader weaknesses within the banking system.

He commented that the banking system was not generally affected by such vulnerabilities, and also highlighted that the acquisition of Credit Suisse appeared to have had a beneficial outcome.

As per the policy statement released by the Federal Open Market Committee, the banking system of the United States is regarded as "resilient and sound."

Despite this, the stock market recorded significant losses after Powell, in a press conference, indicated that officials would remain focused on combating inflation, while also monitoring the impact of recent bank collapses on the demand and pace of lending.

After delivering eight rate hikes in the past year, the Federal Reserve announced a highly anticipated increase in interest rates to balance the risks of inflation and banking system instability. However, due to the recent collapses of Silicon Valley Bank (SVB) and Signature Bank, the Fed's latest policy statement no longer suggests ongoing rate hikes would be suitable. The banking sector has been in turmoil since the closure of Silicon Valley Bank by California regulators on March 10, which was the most significant bank failure in the US since the 2008 financial crisis. This collapse, along with that of Signature Bank, sparked concerns among investors about potential additional "ticking bombs" within the banking system, causing a significant slump in banking stocks. Furthermore, it led to UBS Group AG's takeover of 167-year-old Credit Suisse Group AG (CSGN.S) to prevent a more substantial crisis.

The Federal Reserve's persistent rate hikes, implemented to control inflation, have been identified as a contributing factor to the largest banking sector collapse since the 2008 financial crisis. "The Fed is now relying on hope and prayers that they have not caused irreversible damage to the banking system," said Brian Jacobsen, a senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. "The Fed may be considering that financial pressures will substitute future rate hikes." Despite the recent turbulence, Jane Fraser, the CEO of Citigroup Inc (C.N), expressed faith in US banks and stated that the upheaval did not indicate a credit crisis.

In Washington on Wednesday, Treasury Secretary Janet Yellen expressed her desire to resolve the problems of a few troubled banks before they spread. "This is a situation where it's a few banks that have some problems, and it's better to make sure that we nip that in the bud," she said. Despite the concerns, Yellen confirmed that the Treasury Department is not discussing the insurance of all uninsured bank deposits and has not considered any guarantees for assets. As officials work to restore confidence in the banking system, JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon is expected to meet with Lael Brainard, the director of the White House's National Economic Council, during his planned trip to Washington. First Republic Bank (FRC.N), which is struggling to recover, saw its shares drop by over 15%.

In an effort to calm regional bank stocks, Pacific Western Bank (PACW.O) raised $1.4 billion from investment firm Atlas SP Partners. However, shares of the bank still closed down 17%. Despite the bank's attempt to reassure investors by stating it had over $11.4 billion in cash as of March 20, the CEO of hedge fund Man Group (EMG.L), Luke Ellis, predicted further bank failures due to the recent market volatility. Policymakers from around the world have stressed that this turmoil is different from the crisis 15 years ago, with banks being better capitalised and funds more easily available. While the collapse of Silicon Valley Bank kicked off a tumultuous 10 days for banks, which resulted in the $3.2 billion takeover of Credit Suisse by UBS (UBSG.S), officials hope to restore calm to the banking system.

After the recent failures of SVB and Signature Bank, two Senators in the United States are proposing a new law that would replace the Fed's current internal watchdog with one appointed by the president, with the goal of strengthening bank supervision. Republican Rick Scott and Democrat Elizabeth Warren have attributed the banks' failures to regulatory shortcomings at the Federal Reserve, which currently has an internal inspector general that reports to the Fed board. The Federal Reserve has not yet issued a comment on the proposed legislation.

According to a source with knowledge of the situation, the Federal Deposit Insurance Corporation (FDIC) has extended the bid deadline for Silicon Valley Private Bank to Friday, which was originally set for Wednesday. After failing to find a buyer for the failed lender last week, the FDIC has decided to split up Silicon Valley Bank and hold two separate auctions for its traditional deposits unit and its private bank.