Beautiful Virgin Islands


Fed sees credit drawdown looming, shifts towards pause on rate hikes

Fed sees credit drawdown looming, shifts towards pause on rate hikes

Federal Reserve Chair Jerome Powell on Wednesday said banking industry stress could trigger a credit crunch with "significant" implications for an economy that U.S. central bank officials projected will slow even more this year than previously thought.

Banks either hit with sudden deposit outflows or worried about them may become steadily more reluctant to lend to businesses and households, a risk that prompted the U.S. central bank to reset its own expectations for monetary policy as it waits to see how far any contraction of credit may spread and how long it may last.

"We'll be looking to see ... how serious is this and does it look like it's going to be sustained," Powell said at a news conference following the conclusion of the Fed's latest policy meeting. "It could easily have a significant macroeconomic effect, and we would factor that into our policies."

The Fed's policy-setting committee raised interest rates by another quarter of a percentage point in a unanimous decision on Wednesday, lifting its benchmark overnight interest rate to the 4.75%-5.00% range.

But in doing so it recast its outlook from a hawkish preoccupation with inflation to a more cautious stance to account for the fact that changes in bank behavior may have the equivalent impact of the Fed's own rate hikes - perhaps just a quarter of a percentage point, but possibly far more than that.

Fed officials still feel that "some additional policy firming" may be needed, and they penciled in one more quarter-of-a-percentage-point rate increase by the end of the year.

But the more conditional language, replacing a promise of "ongoing increases," amounted to a seismic shift driven by the rapid failure this month of California-based Silicon Valley Bank (SIVB.O) and New York-based Signature Bank (SBNY.O), as well as the Swiss-engineered rescue of Credit Suisse.

U.S. officials across several agencies have been coping with the fallout, debating what new rules or regulations might be needed and whether changes are needed to the U.S. deposit insurance program - a systemwide backstop that failed to stem a deposit run at SVB.

The policy statement and Powell's remarks to reporters also showed Fed officials' rising attention to credit dynamics, something that could actually help them in the fight to tame inflation as long as any changes to the flow of loans does not become disorderly and that more bank failures are not in the offing.

"Financial conditions seem to have tightened and probably by more than the traditional indexes say because ... they don't necessarily capture lending conditions," Powell said. "The question for us is how significant will that be?"

Powell on Wednesday repeatedly voiced confidence in the stability of the U.S. financial system, noting that "deposit flows in the banking system have stabilized over the last week," and that SVB collapsed because "management failed badly," not because of generic weaknesses in the banking sector.

Still, the Fed chief said the collapse showed a breakdown of central bank supervision that needed to be fixed, and was being studied in a review due to be completed by May 1 under the direction of Michael Barr, the Fed's vice chair for supervision.

Yields on Treasury securities dropped following the release of the policy statement. The yield on the 2-year Treasury note , which is highly sensitive to Fed rate expectations, was down more than 21 basis points in the session.

U.S. stocks, which initially surged after the release of the policy statement, fell through the afternoon, with the benchmark S&P 500 index (.SPX) closing 1.6% lower. The dollar (.DXY) weakened against a basket of major trading partner currencies.


'SPOOKED'


The outcome of the policy meeting puts the Fed likely near the end of an aggressive series of rate increases that have dominated financial headlines for a year as the central bank tried to lower inflation from the 40-year-highs hit last summer to its 2% annual target.

Financial markets went a step further, betting that the Fed won't raise rates any further from here and will be reducing them by this summer.

"That's not our baseline expectation," Powell said in the news conference, adding that "the key is we have to have policies tight enough to bring inflation down to 2%," whether that comes from a higher Fed policy rate or market conditions that tighten on their own.


Still, the turmoil will likely take a toll on GDP growth and the economic outlook.

New economic projections from Fed officials see the unemployment rate rising nearly a full percentage point in the remaining months of the year, to 4.5% from the current 3.6%, with inflation falling only slowly and growth in gross domestic product downgraded from an already sluggish 0.5% to 0.4%.

"The Fed has been spooked by Silicon Valley Bank and other banking turmoil. They certainly point to that as a potential depressant on inflation, perhaps helping them do their job without having to raise rates as aggressively," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.

Newsletter

Related Articles

Beautiful Virgin Islands
0:00
0:00
Close
Federal Reserve Chair Powell: "We are prohibited from owning Bitcoin and are not seeking any changes to that law."
A Democratic congresswoman with blue and black hair is having a meltdown over "President Musk."
A sizable group of unauthorized migrants is traveling through Mexico with the aim of reaching the USA before Trump assumes office.
Beatles Reunion Electrifies London: Paul McCartney and Ringo Starr Ignite O2 Arena with Surprise Performance
Starmer's Envoy Engages Trump Team as UK Seeks Strategic U.S. Partnership
Britain's Retail Rebound Falters as Black Friday Splurge Dissipates
Bank of Japan's Bold Reckoning: A Decade of Unconventional Policy Under Scrutiny
Republican Discord Threatens Government Shutdown Amid Holiday Season
French Retiree Dominique Pellico Convicted for Recruiting 72 Men to Assault Wife Over a Decade
Putin Defends War Strategy as Global Tensions Rise
Putin Claims Progress as Tensions Rise: Conflict in Ukraine Intensifies
Putin's Paradox: Claiming Strength Amidst Sanctions and Isolation
Water as a Weapon: The Contentious Struggle for Survival in Gaza
Syria's Future: A Fight for Democracy or Another Cycle of Oppression?
UK Considers Sending Troops to Ukraine: A Strategic Move or Intensifying The Proxy War?
Renewed ISIS Threat Puts Syria’s Cultural Heritage in Peril
Escalation in Moscow: High-Profile Assassination and International Tensions Intensify
North Korean Troops in Ukraine: A New Cold War Frontier?
Ukraine's Bold Move: High-Stakes Assassination of Russian General in Moscow
Dubai's Technological Leap: Brain Chips and AI Board Members by 2025
Tragedy Strikes Wisconsin School as Shooting Claims Lives of Teacher and Student
UK's Calculated Gamble: Balancing Defense Aid to Ukraine and Domestic Demands
UK Intensifies Stranglehold on Russian Oil, but Does It Dampen Putin’s Resolve?
British Voter Endorsement of Reeves's Bold Tax Strategy
Nicola Sturgeon Warns of 'Toxic' Discourse: The Perils of Polarisation in Modern Politics
Levelling Down: How the Conservatives Underspent on Regional Revitalization
Alleged Chinese Espionage: The Entangled Web Beyond Prince Andrew
Starmer Navigates Diplomatic Tightrope Amid Chinese Espionage Revelations Involving Prince Andrew
Balancing Democracy and Disorder: The Trial of a Milkshake Incident
Royal Mail Enters New Chapter Under Czech Ownership
UK Companies Slash Jobs Amid Economic Strain
Kemi Badenoch Rekindles Flat Tax Debate Amid Inheritance Tax Uproar
Rewiring Whitehall: New Cabinet Secretary's Mandate for Change
Legal Battle Revives: Lucy Letby Seeks Fresh Appeal as Expert Evidence Faces Scrutiny
Accusations Fly as UK-China Relations Spark Tension Within British Politics
The Delicate Dance of Devolution: As English Council Elections Face Delays
The Alleged Chinese Spy at the Heart of British Royal Circles: Yang Tengbo Unmasked
Prince Andrew Withdraws from Royal Christmas Amidst Chinese Espionage Scandal
EU Takes Legal Action Against UK Over Allegedly Neglected Rights of EU Citizens
Disaster Strikes: Oil Spill in the Black Sea and Cyclone Devastation in Mayotte
Oil Tanker Disaster in the Kerch Strait: A Confluence of Environmental Catastrophe and Geopolitical Tensions
Olaf Scholz’s Gamble: The Collapse of Germany’s Coalition Government and the Path to Early Elections
Keir Starmer's 'Sycophantic' Tone: Tensions Rise Over UK-China Relations
Trump Recognizes Partial Advances in Ceasefire Attempts in Ukraine Conflict
UK Navigates Complex Global and Domestic Challenges Amid Security, Environmental, and Health Concerns
Tragic Loss of Fashion Visionary: Isak Andic's Enduring Legacy Beyond Mango
UK's CPTPP Gamble: A Strategic Leap Toward the Indo-Pacific
Mango Founder Isak Andic Dies in Tragic Accident
Disney’s Dangerous Power Play: How Bob Iger's Personal Agenda Could Cost His Company Billions
ABC's $15 Million Settlement: A Turning Point in Media Defamation Battles
×