The Federal Reserve (Fed) has recently delivered a 25 basis point rate hike, which is the fourth time they have done so this year. This rate hike comes as a sign of varying economic conditions, looking to balance between growth and inflation.

The Fed’s move to raise the Fed Funds Rate from 2 to 2.25%, signals their stance that the economy is strong, growth is healthy and inflation is picking up. The rate hike is an attempt to “cool the economy” by including an increased borrowing cost for banks and other creditors, with the end goal of ultimately slowing down economy.

The rate hike was also something of a bittersweet moment as it occurred in the same week as two major bank failures. Bank of Kansas City and Valley Capital Bank were the second and third banks to fail this year. These lenders, that once had a combined total of $1.4 billion in assets, signaled that the banking sector may be at the capacity of its strength.

Banks can experience tight liquidity during times of economic downturn, and fail if they cannot find the capital to keep operating. In some cases, the lending assets these banks offer are of riskier quality and higher return, thus they fail to gain the confidence of the Fed or capital markets. Rating agencies and investors are also more prone to pricing risk into loans when the economy is not at its strongest.

Though this rate hike signals the Fed’s view of an overall steady and healthy economy, the failed banks indicate that the economy includes issues of liquidity and risk. The Fed will continue to monitor market behaviors and economic indicators in order to appropriately adjust the rate in order to maintain a balanced economy for the future.

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