With Banks in Focus, the Fed Signals (Cautious) Optimism

Yesterday, the Fed raised its benchmark interest rate 25 basis points to a 4.75%–5.0% range and signaled that one more hike is likely this cycle. Some investors might see this as tone-deaf: given the bank turmoil, why keep tightening policy with higher rates already causing issues? Could this reflect pessimism—a Fed so worried about inflation that it must keep tightening despite banking challenges?

We think it’s the opposite—the Fed’s choices are best viewed as reflecting cautious optimism in two significant ways.

The Fed Isn’t Hearing Echoes of Past Crises

First, the Fed’s decision to raise policy rates suggests confidence that bank turmoil won’t spiral into a systemic crisis. The statement from the Federal Reserve Open Market Committee (FOMC) described the sector as “sound and resilient,” with Fed Chair Jerome Powell reiterating that language in his press conference.

Powell also indicated that the Fed believes deposit outflows are slowing and that the policy response rolled out to date has supplied enough liquidity to keep the overall system stable. By raising rates, the Fed is essentially expressing optimism that the banking sector is robust enough to weather this episode, despite the trying events in recent days.