June 8, 2023

Hardwood Paroxysm

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Exceeded 5%, not since 2007 – Corriere.it

US interest rates are over 5%. Confirming market expectations, the Federal Reserve raised the cost of money by 0.25%. This is the tenth consecutive increase, which has kept the federal funds, i.e., the reference rates, in the range of 5-5.25%, the highest level since mid-2007.

This may be the latest intervention by the US Central Bank. “Support for the new adjustment has been very strong, and we’re getting close to that, but we may be there,” Fed Chairman Jerome Powell said at the usual briefing following the announcement of monetary policy decisions. But he insists it will be an “ongoing, meet-to-meet” assessment. Why The Fed’s Monetary Policy Committee, “decided to increase, but did not discuss a break,” precise. with emphasis, “The Big Change” in guidanceie the guidelines for the work of the central bank. The Fed removed the sentence from its earlier statement that it may need “more” rate hikes. He replaced it with a statement that it would consider a number of factors to “determine the range” of “future hikes” that might be appropriate. From now on, to bring inflation back to the 2% target, “the committee will take into account the cumulative tightening of monetary policy, and the delay with which monetary policy affects economic activity, inflation, and economic and financial developments.”

At the end of the year, Powell sees the CPI at 3% (at the end of March it was 5% from a peak of 9.1% last June). But, he says, “we will get inflation to the 2% target over time.” Fortunately, we can do this without penalizing the labor market. And for this “A recession is more likely to be averted than stagnate.” It is Powell’s personal opinion, while economists From the Fed’s estimate of a “moderate recession.”

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but A federal rate hike that began in March 2022 has more than doubled mortgage rates, the costs of auto loans, credit cards and business loans have increased. And caused a decline in home sales. The recent Fed intervention could raise funding costs.

Rising interest rates, the most violent in the past 40 years, also contributed to the collapse of three major banks in less than two months: In mid-March, Silicon Valley Bank and Signature Bank, and then last weekend First Republic, were sold at a speed auction to JpMorgan. The three failed banks bought long-term bonds, which drove down rates and quickly lost value as the Federal Reserve raised interest rates. “The solution of the three banks was at the heart of the crisis, and all customer deposits were protected. Now we have to focus on what happens to the availability of credit ».

The recent turmoil has already caused banks to cut back on lending. In the future, credit could decline further in the face of the need for institutions to increase liquidity, as well as in light of the strengthening of regulatory rules. Powell explained in March that this could amount to a quarter-point rate increase in a slowing economy. That’s why “in light of these uncertain headwinds, as well as the monetary policy constraints we’ve put in place,” The Fed’s future actions ‘will depend on how events unfold’claims the banking lawyer. He repeats: “Meeting, meeting.”

But recent bank meltdowns, in addition to highlighting the need to tighten rules and strengthen controls, as emerged from the investigation into the SVB crash by Federal Reserve Vice President for Banking Supervision Michael Barr, also taught another lesson: How quickly customers withdraw deposits in the so-called The bank works. Unprecedented speedWe now know it’s possible and we’ll have to take that into account, “says Powell. Who also depends on fiscal policy when He warns of the possibility of state failureWhich could happen as early as June, Treasury Secretary Janet Yellen warned. “No one should think that the Fed can protect against the damage such an event would do to the United States,” he says. But that’s another story.

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It is this huge uncertainty, amidst inflationary pressures, fears of recession and banking turmoil, that drives the market to bet on a temporary halt in the Fed’s actions and an end to rising interest rates. Still a premature turning point in the eurozone.