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FOMC Walks Fine Line…

FOMC

FOMC raises rates 25bps, Is the Fed making lemonade out of lemons? Or showing a hawkish front in a attempt to signal less systemic risk from the banking sector?

Main takeaways:

  • The Federal Reserve has raised its benchmark interest rate by 25 basis points to a target range of 4.75%-5%, indicating expectations of higher interest rates in the future.
  • The Fed’s median forecast shows rates at 5.1% by the end of 2023 and 4.3% by the end of 2024.
  • The Fed may implement additional policy firming, including further rate hikes if necessary.
  • The Fed will continue reducing its holdings of Treasury and mortgage-backed securities at the same pace as before.
  • The Fed is taking a cautious approach to interest rate policy, prepared to raise rates if needed, but acknowledging risks to the economy and financial system.

The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.65 percent, effective February 2, 2023. The Federal Open Market Committee voted to authorize and direct the Open Market Desk to execute transactions in the System Open Market Account.

Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.65 percent, effective February 2, 2023 . Board approved requests to establish that rate submitted by the Boards of Directors of the . Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco .

Looking further into the decision.

Amid high inflation, persistently low unemployment and a banking crisis, the Federal Reserve announced a 25-basis-point increase to the federal funds rate — the ninth hike since March 2022. The latest hike brings the current rate level to 4.75% to 5.00%. The rate hike was not a sure thing following the collapse of two U.S. banks due to bank runs: SVB on March 10 and Signature Bank on March 12. But the banking crisis could end up serving the Fed’s goals; tightening credit conditions could be a “substitute for rate hikes,” said Fed Chair Jerome Powell in a press conference following the rate hike announcement.

The Fed seemed undeterred by the banking crisis in its efforts to address persistently high inflation. Powell said the banking system “is strong, it is sound, it is resilient, it’s well capitalized.”

Be that as it may a “pause” as some predicted might have been too risky for the Fed as it may have signaled to some markets that the other shoe has yet to drop, and the banking crisis may be more systemic and deeply rooted.

After Sundays announcement of now Daily Liquidity Swaps, and today’s rate decision followed by a fairly hawkish press conference. The one thing we can say for sure is that more changes and pivots will be in store for the remainder of the year. Looking further into the Fed’s Balance sheet, we see that the emergency loan programs, and additional liquidity offered to help back stop banks to prevent a full-on bank run, has basically eliminated the last 8 months of QT. Which poses the question is it still QE if you call it something else?

Gold and Bitcoin both took a liking to the decision, While the Dollar got hit hard, and began dropping immediately on the news.

Press Conference Key Points

  • Consumer spending appears to have picked up this quarter
  • Activity in the housing sector remains week, largely reflecting higher mortgage rates
  • Committee participants expect subdued growth to continue
  • The labor market remains extremely tight
  • Wage growth easing
  • Job vacancies high
  • Inflation remains “well above” our goal of 2%
  • Considered a Pause leading up to the meeting supported by a “very strong consensus”
  • Ongoing rate hikes changed to “some additional hikes” and “policy firming” verbiage added to the statement
  • Focused on macroeconomic outcomes, including financial stability and lending facilities
  • Paying attention to the actual and expected effects from credit crunch for future hikes
  • What happened to Silicon Valley Bank? SVB management failed badly and exposed the bank to significant liquidity risk and interest rate risk and didn’t hedge that risk. Supervisors saw the risks and intervened. We know SVB experienced a rapid bank run from a connected group, a condensed group of depositors. Fed is conducting a review to find out “what went wrong.”
  • Powell said not to worry about other banks as SVB is “an outlier”
  • Fed expects slow growth and supply/demand rebalance with inflation moving down. Participants do not see rate cuts this year.

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