On Wednesday the Federal Reserve raised interest rates for the ninth time
in a row since March 2022, choosing to continue its fight against high
inflation despite stress in the banking sector, following the recent
collapse of two regional banks.
The Federal Reserve delivered a 25-basis point interest rate increase, but
it took a more cautious stance about further increases. The Fed indicated
that rate hikes are approaching an end and noted that future increases will
depend largely on incoming data. The fed funds rate is seen reaching 5.1%
this year, 4.3% by the end of 2024 and falling to 3.1% in 2025.
Source: Trading Economics
The Fed noted the U.S. banking system is sound and recent developments are
likely to result in tighter credit conditions for households and businesses
and also weigh on economic activity, inflation and hiring.
Fed Chair Jerome Powell signalled that the fight against inflation isn’t
over, but “ongoing” rate hikes was removed from the statement and was
replaced with “additional policy firming may be appropriate”. The subtle
changes have a lot of implied meaning and was perceived as more dovish,
leading investors to believe that the Fed might only hike once more.
Members of the Federal Open Market Committee are of the view that slightly
higher rates may be necessary to combat inflation. Policymakers anticipate
rates to climb by another 25-basis point by the end of 2023, according to
the new projections released on Wednesday. They anticipate that some
additional policy firming may be appropriate in order for monetary policy
to be sufficiently restrictive to bring inflation to the Fed’s 2% target
over time.
Some major investment banks were calling the central bank would pause its
rate hikes, at least temporarily, in order to calm the stress from the
collapse of Silicone Valley Bank and Signature Bank earlier in the month.
However, Treasury Secretary Janet Yellen said that large withdrawals from
the regional banks have stabilised in recent days and pushed back against
suggestions of a blanket insurance of all U.S. banking deposits. This
unnerved investors as few of them believe the banking stress has fully
dissipated and how it would impact lending and the economy.
The U.S. central bank also cut its median forecast for real GDP growth this
year to 0.4% from 0.5%, suggesting the banking crisis was already having an
impact on economic activity, albeit limited at the moment.
The Fed Chair said that inflation is likely to decline gradually throughout
2023 and 2024 and while future interest rates are uncertain at the moment,
rate cuts are unlikely this year. Mr Powell also said that while the Fed
has made some progress on bringing down inflation, there’s still a long way
to go and the way to the Fed’s 2% target may be “bumpy”.
Source: TradingView
U.S. equity indices whipsaw during the statement and the subsequent press
conference but finished the session sharply lower. Investors were hoping
the Fed would stop hiking as worries that the battle against inflation
could lead to a recession were reinforced by the recent stress in the
financial sector.
Treasury Secretary Janet Yellen exacerbated the selloff with remarks that
the Federal Deposit Insurance Corporation (FDIC) is not considering or have
discussed “blanket Insurance” for all U.S. bank deposits without approval
by Congress.
The weekly RSI indicator remains below 60% since January 2022 suggesting
that the stock market has been and remains in a bear trend since then. The
daily RSI indicator is below the bear market resistance of 60% too and
remains there at present. The first encouraging sign for the bulls at this
juncture in time would be a sustained RSI break above 70% or the index
clearing its key resistance of 4,325.
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