2023-05-03 20:06:15
The United States Federal Reserve (Fed) faced one of its most complex decisions on Wednesday. As expected, the central bank has undertaken its tenth consecutive rise in interest rates, of another 25 basis points, leaving the range at 5.00%-5.25%. They are maximums of the last 16 years. But everything indicates that it will take a breather to see how this cycle is affecting the economy.
“We will go meeting by meeting,” said central bank president Jerome Powell. To the chagrin of the market, he assured that this possible pause “has not been discussed today.” But, at the same time, he described as “significant” that the central bank’s statement no longer anticipates new increases in interest rates, as it did up to now. That is to say, it leaves the door open, even minimally, to that brake that investors so long for.
He did want to make it clear, yes, that inflation continues to be the main enemy to beat. The president of the Fed recalled that after the increases undertaken in the last year “it takes time to check all the effects of monetary restriction on the economy”, indicating that “we are prepared if greater moderation in economic policy is needed”. .
Focus on communication
Although the speech has not convinced everyone, Powell’s movement has been measured to the millimeter in the face of the complex labyrinth in which the country’s monetary policy still finds itself. On the one hand, the economy has put on the brakes with growth of barely 1.1% in the first quarter. On the other, consumption and the labor market remain strong. Inflation subsides. But the current 5% is still far from the Fed’s 2% target.
If we add to all this the recent banking crisis – in which interest rate hikes have had a lot to do with it – it seems clear that Powell’s men still have work ahead of them to restore confidence in the market. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain,” the agency said in its statement.
However, Powell defended that “the financial sector is solid and conditions have improved since the beginning of March.” A surprising expression after the recent fall of the First Republic Bank.
Impact of the ‘shock’
The consensus agrees that factors such as “the vulnerability of regional banks or the issue of raising the debt ceiling” reinforce the idea that this will be the last rate hike by the agency. “We may not be too far from the final level,” Powell explained when asked by the media. Some even think that the Fed will have to lower them before the end of the year to avoid the risk of recession.
And it is that no matter how safe the US banking system is, the bankruptcy of First Republic Bank has increased the number of failed entities to four in just a couple of months, after the collapse of Silvergate Capital, Silicon Valley Bank and Signature Bank . And the market has already focused on the next victim: the PacWest Bank, which collapsed almost 30% on Wall Street on Tuesday.
At the moment, and according to calculations by the Bloomberg agency, since the end of February the shareholders of the fallen banks have suffered losses of 46,900 million dollars due to the collapse of the prices, to which should be added another 7,500 in bonds and other types of debt of these entities.
In addition, this crisis has already begun to tighten credit conditions. And this has a double side. On the one hand, it contributes to the economic slowdown. But precisely this cooling can also help to relax inflation, which, after all, is the ultimate objective of the Fed.
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