Fears of global market shakedown shift to US Fed as rate hike looms
After a close shave for the global banking sector comes a close call at the world’s most important central bank.
The US Federal Reserve starts a two-day rate-setting meeting on Tuesday, having signalled its fight against inflation is not yet done.
At the same time, the impact on of its rapid run of interest rate rises on some of the biggest names in world finance is showing through in a spate of disruption in the banking sector, including emergency rescues, full-blown failures and global worries about potential contagion.
The Federal Open Market Committee meet just a week after Silicon Valley Bank’s multi-billion dollar collapse, the biggest failure in the sector since the 2008 Financial Crisis. And it is just days after former financial titan Credit Suisse was forced into a $3.3 billion (£2.7 billion) shotgun wedding with its one-time arch rival, UBS.
Both banks were hurt by a sharp fall in the value of the government bonds they hold, as interest rate rises at central banks cut demand for the assets which are often sold by financial companies to meet their own obligations. Balance sheets across the sector are weaker due to unrealised losses from the drop in the value of government debt.
Tomorrow’s announcement on US interest rates marks the anniversary of the first hike of the current cycle. It has lifted its Fed Funds target rates eight times since to its current range of 4.5% and 4.75%. It was at 0.25% to 0.50% a year ago.
The Fed has been clear in voicing its determination to use rate rises to tame inflation in order to get it down from double-digits toward its target of 2%.
But after the turmoil in the banking sector, including a run on deposits at smaller regional US banks, attention has shifted from inflation. As the knock-on effects of the sheer speed of the Fed’s hikes emerge, policymakers led by Fed chair Jerome Powell are in a dilemma.
There is even talk among City and Wall Street experts of a potential rate cut this week as the shockwaves of the banking collapses stokes of a potential crisis.
Michael Hewson, chief market analyst at CMC Markets said: “The Fed runs the risk that it sends the message it is more concerned about financial stability than it is about its fight against inflation. A rate cut would send an even worse message that the Fed sees something the market doesn’t and could spook already jittery markets even further.”
Neil Wilson, chief market analyst at Finalto, said: “I don’t think the Fed blinks unless we see a lot more turmoil,” adding:“Once events take over, policymakers are left with zero good options. The Federal Reserve faces a dilemma and one of the most difficult decisions in years … It seems as though the Fed will … raise, though it may refrain from a full 0.50% and prefer 0.25%. Markets price in a roughly 83% it goes for this move, with a 17% chance of no hike.”
The Bank of England is due to make its announcement on UK rates on Thursday. Over 50% of investors now expect the Bank of England to leave rates alone according to a Refinitiv poll. At the beginning of the month, just 10% expected the BoE to sit tight.
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