Source: Wind

At 2 p.m. local time on Wednesday, the Federal Reserve held an interest rate meeting, followed by Federal Reserve Chairman Powell attending the press conference. Before the interest rate meeting, most market analysts predicted that there was a high probability that the Fed would raise interest rates by 25 basis points again.

The Federal Reserve raised interest rates by 25 basis points

At 2:00 a.m. on March 23, Beijing time, the Federal Reserve issued an interest rate resolution: the interest rate hike remains at 25 basis points. This is the second time this year that the Fed has raised interest rates. The last time the Fed raised interest rates was on February 1, 2023. Analysts predict that interest rates will be raised in May or for the third time this year.

The Federal Reserve resolution statement removed the phrase “it is appropriate to continue to raise interest rates” and replaced it with “some additional policy tightening may be appropriate.” Furthermore, the statement said that the US banking sector is healthy and resilient, but many bankruptdowns will drag down economic growth. Analysts believe that this resolution statement suggests that the interest rate hike cycle is nearing its end. However, during the press conference, Federal Reserve Chairman Powell reiterated that inflation is still too high and emphasized that interest rates should continue to be raised. Meanwhile, Finance Minister Yellen said that the government is not considering extending insurance coverage to all deposits.

Analysts said that Powell's hawkish rhetoric and Yellen's statement all suppressed US stock gains, causing the three major indices to recover their intraday gains, and dived to close to intraday lows at the end of the session. By the close, the Dow fell 1.63% to 32030.11 points, the S&P 500 index fell 1.65% to 3936.97 points, and the NASDAQ fell 1.6% to 11669.96 points.

According to the institutional view, the main effects of the Fed's interest rate hike are as follows:

Interest rate hikes by the Federal Reserve have raised interest rates on loans between commercial banks, and increased borrowing costs have had a direct impact on social investment and consumption behavior, curbing consumption to a certain extent.

At the same time, the Fed's interest rate hike is beneficial to exports; it increases the demand for the US dollar from international funds and pushes the dollar to appreciate.

According to the latest inflation data, the US CPI increased 6% year on year in February, the smallest year-on-year increase since September 2021. It is also the 8 consecutive months since the US CPI increase peaked at 9.1% in 40 years in June 2022.

Wall Street is divided into two factions

As a result of the banking crisis, the prospects for the Fed's interest rate hike have become uncertain.

Jim Bianco, president of Bianco Research, said that this is the most uncertain Fed interest rate meeting since 2008. However, in any case, expectations of interest rate hikes have weakened. At least there are no institutions that expect the Fed to raise interest rates by 50 BP this week as in February.

Beginning with former Federal Reserve Chairman Bernanke, Fed officials have perfected the art of making market prices and deciding what the Fed will do at every upcoming meeting, at least in terms of interest rates. Jim Bianco said on social media that market prices determine changes in interest rates almost 100% of what happens.

Currently, Wall Street is divided into two camps in this regard, which think the interest rate will be raised by 25BP and the suspension of interest rate hikes.

However, the Fed's meeting this week was different because after the government bailed out Silicon Valley banks, people's confidence in the US banking system suddenly collapsed, and the collapse of Credit Suisse further shook the market's expectations of aggressive tightening by the Federal Reserve.

According to FedWatch data from the Chicago Mercantile Exchange, currently, the market thinks the probability of raising interest rates by 25BP is 73%, and the probability of not raising interest rates is 27%. Analysts said that according to the trend at the front end of the curve, the market seems to be increasingly expecting interest rate hikes.

Ian Katz, a financial sector analyst at Capital Alpha Partners, said: “According to some market views, the Fed's decision will be seen as either surrendering to the market or being isolated from the market in the Ivory Tower. ”

Reasons for suspending interest rate hikes

The market believes that the main reason the Fed has suspended interest rate hikes is that the banking system is under pressure. If the Fed continues to raise interest rates, it may further heighten people's concerns about the stability of the banking sector.

Goldman Sachs chief economist Jan Hatzius said: “Despite policymakers responding positively to support the financial system, the market does not seem fully convinced that efforts to support small to medium banks will prove sufficient. Therefore, we think Fed officials will agree with us that the pressure on the banking system remains the most pressing issue at present. ”

Former New York Federal Reserve Chairman William Dudley said he would suggest suspending interest rate hikes. “The reason for a zero rate hike is 'don't cause harm'”.

Diane Swonk, KPMG's chief economist, asked: “It may now be necessary to quickly reverse interest rate hikes to deal with a deeper, more uncontrolled recession and anti-inflation. The Fed may be forced to cut interest rates faster than previously hoped, so why should they raise interest rates? ”

Ernst & Young's chief economist Gregory Daco said that economic activity is slowing down, which has given the Fed time. He said, “We are not in a hurry to raise interest rates; we will not experience hyperinflation because of this.”

Reasons to support continued interest rate hikes

The argument against the suspension is that it may raise more concerns about the banking system.

Former Federal Reserve Vice Chairman Roger Ferguson told the media this week: “I think if the Fed stops, they will have to explain exactly what they see and what makes them more concerned. I'm not sure if the suspension of interest rate hikes is reassuring. ”

The main reason for raising interest rates of 25BP to 4.75%-5% is that it may bring confidence.

Max Kettner, HSBC's chief multi-asset strategist, said: “What policymakers need is a stable hand, a stable ship. They don't need to act excessively”. He added that the Fed should explain that so far it has controlled the situation, stabilized confidence, and said it can continue to fight inflation.

Oren Klachkin, chief American economist at the Oxford School of Economics, said he did not think “the recent bank collapse poses a systemic risk to the entire financial system and economy.” He pointed out that “inflation is still very high,” and the Fed has a better way to ease the pressure on the banking industry.

The trend of US bond yields

As the Fed continues to raise interest rates this year, the yield on its various treasury bonds has fluctuated greatly.

Wind data shows that the Fed raised interest rates rapidly several times in a row last year, and the yield on various US bonds also rose sharply. The 1-year term rose from 0.4% in early 2022 to a high of 4.8% in November; the 5-year term rose from 1.37% at the beginning of last year to a high of 4.45% in mid-October; and the 10-year term also rose sharply from 1.63% at the beginning of last year to a high of 4.25% in late October.

It can be seen that all issues of US bonds were sold off sharply by holders last year, treasury bond prices fell, and yields rose rapidly.

As interest rate hikes continue, interest rates have reached a high level, and the market expects the Fed's interest rate hike to come to an end.

Therefore, since this year, with the exception of 1-year US Treasury yields reaching new highs, the remaining 5-year and 10-year bonds have consolidated or declined at high levels, and have failed to reach new highs. In particular, the Fed is fully expected to raise interest rates slightly in March, and 5-year and 10-year US bonds have declined even more rapidly. Currently, the latest yields are 3.73% and 3.59%, respectively, which is significantly lower than the October high last year.

Organizational outlook

J.P. Morgan strategists believe that although the US bond market has recently experienced some lack of liquidity, the impact on prices is not as severe as when the epidemic broke out. Measured by price impact, the size of each transaction in the market has been rising over the past year, but there has been no significant increase in recent weeks, and it is still below the crisis level. The chaos has increased, but it is far from reaching depressing levels. Therefore, this will not affect financial stability.

Chief economist Li Xunlei said that historically, every round of interest rate hikes by the Federal Reserve is likely to have a financial crisis later in the cycle, and it may be difficult for this cycle to end unsuccessfully. He believes that the banking crisis continues. In the future, the fragility of the global financial system will become more apparent, and various small-scale crises may occur more frequently or even evolve into global financial crises.

According to analysis by Tan Qian and Zhu Zhu of Huaxin Securities, the recent turbulence in overseas financial markets has continued, and the Fed's trend has attracted much attention, and it is facing the trifecta of fighting inflation, preventing risks, and supporting the economy. Considering the resilience of inflation, risk concerns, and the approaching recession, it is expected that the pace of interest rate hikes by the Federal Reserve will slow marginally. It will raise interest rates by 25BP in March, and eventually raise interest rates to around 5.25%. Interest rates will remain high for a long time thereafter, and there will be no rapid currency changes during the year.

Wang Hui of Zhejiang Business International believes that in the context of continuing interest rate hikes, the US Silicon Valley Bank unexpectedly thunderstorms, financial stability has once again triggered a reversal in market expectations about the Fed's monetary policy, and US bond yields have plummeted in the short term. Since the millennium, three of the four cycles of interest rate cuts by the Federal Reserve have all been aimed at maintaining stability in the financial markets. Therefore, we believe that the end of this round of Fed interest rate hikes may be approaching, and US bond yields are expected to peak.

Editor/jayden