Is it the end of the Monetary Tightening Campaign?
The Federal Reserve signals it might soon end interest rates rise when it stops its monetary policy tightening campaign.
They pressed ahead with a quarter-point interest rate rise on Wednesday even with the recent turmoil in the banking sector. However, they did signal it we are close to calling time on their monetary tightening campaign. Following their latest two-day meeting, the FED voted to lift interest rates to a new target range of 4.75%-5% which is the highest level since 2007.
In their statement the FED said the US Banking system is “sound and resilient” but that there was still some uncertainty about the extent to what fallout the banking turmoil will have on the economy. In their strongest signal that the US central bank is almost done with their most aggressive streak if interest rate rises in decades, members of the policy-setting committee removed their often repeated warning about ongoing increases would be necessary. Instead the committee said some additional policy firming might be required to bring inflation back to the banks 2% target.
FED Raises Interest Rates Amid Banking Turmoil Triggered by Silicon Valley and Signature Bank Failures
The rate rise on Wednesday comes at a time of acute uncertainty over whether the US government has done enough to avert a full-blown crises stemming from the failure of Silicon Valley Bank and Signature Bank earlier this month. In a press conference the Federal Reserve Chairman Jay Powell said the measures taken in response to the failures include a guarantee for all deposits held at both those banks. They have also created a new Fed Lending facility to help demonstrate to depositors all their savings are safe.
Jay Powell warned isolated banking problems if left unaddressed will undermine confidence is health banks and threaten the whole banking system. In a sign of how much the recent bank failures have altered the FEDS calculus, the debate among its members just weeks ago centred around whether the central bank should accelerate rase rises by going for a half-point increase. The recent failure of those two banks has clearly impacted the quarter of a percent rise in interest rates we saw today.
The banking turmoil prompted the FED members to consider a pause their campaign. They ultimately decided to press ahead with a smaller quarter point rate rise with a very strong consensus.
Interest Rates Rising Despite Uncertainty Over Banking System and Inflation Concerns
In February the FED slowed down interest rate rises with more traditional quarter-point increase after implementing a string of large rises last year. Earlier this month, Jay Powell floated the possibility of returning to half point rises amid concerns the US Central Bank had not done enough to reduce inflation. Following the release of his statement US stock markets surged before turning negative again after Powell appeared to dismiss suggestions the FED would end up cutting interest rates later this year. The yield on the two-year treasury dipped, indicating lower expectations of interest rate rises going forward.
To not hike would have revealed more concerns with the banking system said David Page of AXA Investment Management. The FED now assumes that credit conditions will tighten to some extent due to the banking turmoil and that will feed through to the economy. That said the FED is also saying “We don’t really know at this stage what the effect will be”. Wednesdays decision was accompanied by a revised set of projections for monetary policy until the end of 2025. Known as the dot plot as well as forecasts for growth unemployment and inflation.
Most officials still expect Interest Rates to peak at 5 per cent to 5.25 per cent this year and that level to be maintained until at least 2024. Policymakers pencilled in a series of Interest Rate cuts by the end of next year, with rates falling back to 4.3%. The forecasts suggest slower growth going forward as well as higher inflation. Growth in the USA is set to slow to 0.4 per cent this year before rebounding to 1.2 per cent in 2024 and 1.9 per cent in 2025. Unemployment in the USA is expected to peak at 4.6% next year showing the labour market is still strong. By the end of 2023, most policymakers expect the core personal consumption expenditures price index to hover around 3.6 per cent before falling back to 2.6 per cent in 2024. Both these estimate are 0.1 percentage points higher than in December. In the days leading up to the March meeting, formal officials, economists and investors were at odds over how the FED should proceed, with those in favour of a pause arguing the US Central Bank could further unsettle an already tenuous situation by pushing forward with another rate rise.
Emergency Lending Facility Implementation as Silicon Valley and Signature Banks Collapse
Following the collapse of Silicon Valley and Signature Banks, the FED rolled out an emergency lending facility to help small and medium-sized banks struggling with a flight of depositors to larger institutions. It also worked with the US Treasury department on the Federal Deposit Insurance Corporation to guarantee deposits held at the two failed banks – even those above the $250,000 threshold for government insurance. Treasury secretary Janet Yellen said US authorities might take further action to shore up the financial system if needed. The FED has come under fire over the recent bank failures, with people asking how closely they were monitoring regional lenders following a rollback of rules governing them. These rollbacks were in fact endorsed by Jay Powell back in 2019. Michael Barr who leads the supervisory matters at the FED, said the central bank is conducting a review of how it managed the failure of Silicon Valley Bank.