The Fed raises US interest rates by 0.25% only so as not to scare away the markets and banks. Powell: Inflation is too high

As expected, fears of a precipitous slowdown in the economy continue to raise questions about the health of the banking system United States of America yet failed Silicon Valley Bank Signature Bank persuaded feed it To slow rate growth: So the increase is 0.25%, bringing the cost of funds to 4.75-5%, a record high since October 2007. Wall Street received the Fed’s pick – the ninth increase since March 2022 – at first with equanimity, but Later selling prevailed again (Dow Jones and S&P lost 1.6%, Nasdaq 1.3%).

The good news

It is clear that the US central bank continues to pursue its inflation target of 2%, which is still a long way off given that the latest data gave it at 6%. Markets are now questioning the duration of the downturn, given that a majority of the Conservatives (10 out of 18) expect only one new increase in 2023 given they left the “final rate” unchanged at 5.1%. In the official memo of the Federal Open Market Committee, the words “continued highs” are omitted, but there is only talk of “a few more highs.” During the press conference, Chairman Jerome Powell stressed that the Fed will use “all the tools at our disposal” to keep the banking system safe, emphasizing that it is “strong and resilient.” “We are working to prevent events like those that occurred in these weeks from happening again,” Powell said, adding that the disruption would create “more difficult credit conditions for households and businesses, causing the economy to slow.” As for the effects on the US banking system, in light of what happened “it is clear – and the banker continued – that we need to strengthen supervision and regulation” of credit institutions.
Finally, on inflation, the second item to weigh in for the Fed in addition to the banking crisis, Powell made it clear that “the process of getting inflation back to 2% is still very long and it’s going to be bumpy” and that although there is. Some obvious improvements were “inflationary pressure remains high”.

Tensions in Frankfurt

While Powell was speaking in the US, there was another clash between hawks and doves in Europe at the European Central Bank monetary policy summit in Frankfurt. Early in the morning, Germany’s central bank governor, Joachim Nagel, at the head of a large patrol of radicals, re-launched the need to insist on raising anti-inflation rates. He added that the ECB should be “adamant” and continue to raise interest rates to fight inflation despite concerns that financial turmoil could affect banks. And again: “There is no doubt that pressure on prices is strong and widespread. If we want to tame this stubborn inflation we must be more stubborn.” According to Nagel, the ECB “must do more” also in terms of shrinking the bond portfolio, which will start this month at a rate of 15 billion.
Soon after, Fabio Panetta, an executive member of the European Central Bank, took over. “I recently said you shouldn’t drive like a madman with the lights off at night,” the Italian banker began, “and recent financial stresses have only made these convictions of mine even stronger.” Monetary policy must be “data-driven and adaptable” – he added – a series of shocks have created uncertainty for the world’s economies, and while the effects of these shocks are beginning to wane, it may take some time before we see a new definition of equilibrium. “. Caution is needed in tightening, as it “already has a strong impact on financial conditions, and instead we must avoid unwanted volatility.” Recent financial tensions in global banking markets will “make banks more sensitive to deposit outflows making them more prudent in lending”.

Read the full article
on the messenger