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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”.
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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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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