The Fed’s decision to hike rates by a quarter percentage point leads to two schools of thought…
- Inflation is easing and they’re going to taper rate increases.
- They’re scared to death that raising rates will lead to further financial collapse.
I’m leaning towards numero dos — they’re trying to prevent mass hysteria.
The Federal Reserve enacted a 1/4 point interest rate increase, expressing caution about the recent banking crisis and indicating that hikes could be nearing an end.
This is their ninth hike since March 2022. The rate-setting Federal Open Market Committee noted that future increases will depend largely on incoming data.
Powell alluded to the inflation fight still having a way to go and said it could be “bumpy.”
He also acknowledged that the events in the banking system were likely to result in tighter credit conditions.
The softening tone of their statement came amid a banking crisis that has raised concerns about the overall financial system’s stability.
Previously, Powell had indicated that the central bank may have to take a more aggressive path to tame inflation.
But a fast-moving banking crisis thwarted any notion of a more hawkish move – and contributed to a general market sentiment that the Fed will be cutting rates before the year comes to a close.
Everything plays a role in these interest rate decisions. When one aspect of consideration benefits, another suffers. It’s truly a difficult balancing act.
While larger institutionalized banks are considered “well-capitalized,” smaller institutions have faced liquidity crunches due to the rapidly rising interest rates that have made otherwise safe long-term investments lose value.
Silicon Valley Bank, for instance, had to sell bonds at a loss, triggering a crisis of confidence which spiraled into other regional banks.
The Fed and other regulators stepped in with emergency measures that seem to have put a lid on immediate funding concerns, but worries linger over how deep the damage is among regional banks.
At the same time, recession concerns persist as the rate increases work their way through all facets of the economy.
It’s pretty obvious that even after yesterday’s rather dovish statements, the market still sold off into the close.
If you haven’t postured yourself for what’s on the horizon, regardless if you believe it or not, it’s better to be over prepared than under prepared.
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