The US economic environment looks extremely fragile amidst the emerging banking crisis in the market.
On Wednesday, May 3, the US Federal Reserve (Fed) announced an increase of 25 basis points, its 10th consecutive increase in a little over a year. Although the announcement was in line with market expectation, the US equity market reacted negatively with all three indices ending in the red.
Fed announces another rate hike
The central bank’s Federal Open Market Committee unanimously agreed to raise its benchmark lending rate by 0.25 percent. The increase takes the Fed’s funds rate to its target range of 5%-5.25%, the highest since August 2007.
However, at this point, the focus of the markets is whether the Fed will stop here or continue raising rates further. Worries over economic growth and a looming banking crisis have already unnerved investors.
During Wednesday’s press conference following the FOMC meeting, Fed Chair Jerome Powell Said he had not made a decision on the pause, however, saw the change in language as “meaningful” for future policy. The Fed chairman’s statement after the meeting gives few clues about the future actions of the US central bank. Analysts expect this could be the last rate hike of this entire monetary tightening season.
In addition, the statement changed the language outlining the conditions under which “additional policy determinations may be appropriate”. Previously, the FOMC had prepared forward guidance in which it would set “the extent of future increases in the target range”.
The statement also reiterated that the Fed will “take into account the cumulative tightening of monetary policy, the degree to which monetary policy affects economic activity and inflation, and economic and financial growth”.
Recession and ‘hard’ loans for households
The US economic environment looks extremely fragile amidst the emerging banking crisis in the market. As a result, even some prominent Democratic lawmakers urged the Fed to hold off on rate hikes this week, citing concerns about a possible recession and extreme job losses.
The good news is that despite this widespread fragility, the labor market has shown strength over the past year. On the other hand, inflation is still well above the 2% target, considered optimal by policy makers. Analysts expect interest rates to remain high for some time, even if the Fed pauses on rate hikes. Speaking to reporters, Powell said:
“Inflation has moderated somewhat since the middle of last year, yet inflationary pressures continue to remain high and the process of bringing inflation back to 2% has a long way to go.”
Along with inflation, the Fed has another challenge to deal with the looming crisis in medium-sized US banks. Overall economic growth since yesterday’s FOMC meeting has been “moderate” while “job gains have remained strong” and inflation has “elevated”. Quincy Crosby, chief global strategist at LPL Research, said: cnbc,
“Although the FOMC statement is little more than what was omitted from the previous statement, it makes clear that the Fed continues to rely on the data as it acknowledges that inflation remains high but it underscores that he wants to monitor the cumulative effects of his aggressive rate hike campaign.
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Bhushan is a FinTech enthusiast and has a great understanding of the financial markets. His interest in economics and finance drew his attention to the newly emerging blockchain technology and cryptocurrency markets. He is in the process of continuous learning and keeps motivating himself by sharing his acquired knowledge. In his spare time he reads thriller fiction novels and occasionally explores his culinary skills.
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