Economics
All eyes on the Fed as investors fret about US regional banks
The Federal Reserve will announce its latest interest rate decision later today and investors will be hanging on their every word in light of recent banking…
The Federal Reserve will announce its latest interest rate decision later today and investors will be hanging on their every word in light of recent banking sector instability.
Today was always likely to mark the end of the US central bank’s tightening cycle – not that it has explicitly signaled this – but we’ve now reached a stage in which every rate hike could have unwanted and unintended consequences.
Turbulence in the banking system in March is evidence of that and the rescue of First Republic Bank by JP Morgan in recent days, and the sell-off that followed in other regional banks, suggests significant stress remains.
Which begs the question, why would the Fed opt to tighten at all today when it can see that the financial system is under strain, credit conditions have tightened as a result and the lag with which monetary policy operates means they don’t yet fully understand what the full impact of their recent rate hikes has been.
With that in mind, it would be perfectly reasonable to pause today especially when we’re already starting to see signs of the labour market softening and inflation easing. And you can see that investors are of the view that a rate hike today is a mistake as they see a high likelihood of it being reversed over the next couple of meetings. Hardly a vote of confidence.
And yet, it still looks extremely likely which makes the Fed’s communication alongside it all the more important. It must now pivot away from promising further rate hikes towards a more neutral stance or we could see further turbulence in financial markets, particularly in those regional banks that still look vulnerable.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
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