Markets are on the edge of their seats, waiting to see what the Federal Open Market Committee (FOMC) will announce following their biggest meeting in many years.
The Federal Reserve will have to make a hard choice that might have big effect on the banking system.
In recent months, rapid rate rises have caused many small banks to lose a lot of money, which puts Fed Chairman Jerome Powell in a tough position.
Disclaimer: I am writing this in a rush; I've been programming for several hours with an IRL friend. I hope I finish this before the FOMC
Most experts, banks, and analysts think the Fed will raise rates by 25bps, but others have called for a pause, saying that doing so might be deflationary and slow down economic development. One outlier is even calling for a rate drop of 25 basis points, which is practically unheard of in the present situation. No matter what happens, the future of small banks remains uncertain.
I'm writing this in a rush, so on top of my head (Don't have the time to check, but I will try to use memory)
- Most banks & analysts think there will be a 25bps rate hike
- Goldman Sachs thinks there will be a pause. Barclays bank analysts changed their mind and thinks a 25bps rate hike or a pause but they lean towards a pause
- Nomura calls for a 25bps rate cut
This is it, will it be Jerome Powell Volcker's moment or not?
There's a lot at stake here. A lot at stake here, on god
The US housing data has calmed fears of an immediate recession while simultaneously heightening concerns that the Fed might continue raising interest rates, even in the face of tighter credit conditions.
Whatever the FOMC decides will have a huge impact. Let's go over the possibilities.
- If they don't raise rates, there will be a collective sigh of relief. On the other hand, the Federal Reserve loses its credibility (Not that they had much credibility, to begin with)
- If they do, it could cause panic & chaos in the markets
- If they raise by 25 basis points but stay hawkish and re-stack their dot plot, the reaction may be somewhat milder.
- Finally, if they hike by 25 bps and then turn dovish or announce they're done, then commodities and risk assets may rally, though unless a credit crunch is coming, inflation could remain an issue. It's a tense time for everyone, so we can only wait and see what happens.
(I really hope I can push this on time)
Crucial Moment as Russia and China Strengthen Their Alliance
This week, the Federal Open Market Committee (FOMC) meets to talk about the US economy in a very important way.
At the same time, Chinese President Xi Jinping and Russian President Vladimir Putin have recently agreed to strongly support each other in safeguarding each other's core interests. This might greatly affect the US currency, which Treasury Secretary Yellen said must be preserved.
Russian and China seem to have agreed to a peace plan, Putin has been invited to Beijing, and they have said they would work together. Putin's suggestion that Russian commerce with Emerging Markets and China be settled in the Chinese yuan might imply that the US dollar's function as the world's reserve currency would be questioned.
The FOMC will have to think carefully about this new situation and the continuing trade-off between inflation and financial stability to make sure that whatever judgments they make will be good ones. What the FOMC does might greatly affect the US currency and our economy. It will be a very important time for the nation and its standing in the world economy.
Please read my medium article I wrote in January: "G7 of the east"
I AM COMING BACK TO ALL OF THIS LATER IN A FUTURE ARTICLE. I DON'T HAVE MUCH TIME TO GO OVER THE DETAILS
Why Goldman Sachs thinks there will be a pause
Goldman Sachs thinks that even while the Fed is acting aggressively, the markets are still not sure whether attempts to help small and medium-sized banks would be enough to stop further stress in the banking system.
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Low net interest margins due to low-interest rates, high loan losses due to COVID-related defaults, lower fee income due to lower consumer spending, higher regulatory costs due to increased scrutiny, and limited access to capital markets due to risk aversion are just a few of the problems that small and medium-sized banks are currently dealing with.
Goldman Sachs thinks that stress in the banking sector is a bigger danger to economic recovery and financial stability than inflation or overheating. They thus anticipate that Fed policymakers would agree with them that it would be smart to pause at this meeting and wait for additional proof that bank lending conditions have improved before making any adjustments to monetary policy.
Implications of the pause
It shows that the Fed is careful about pulling back on monetary assistance too soon or too quickly because nobody knows how well banks will be able to deal with continued problems.
It means that the markets may have underestimated how aggressive or hawkish the Fed would be in the near future regarding increasing interest rates or cutting down on asset purchases.
Despite recent spikes in headline inflation brought on by transient variables like supply shocks or base effects, it shows that inflation expectations may stay anchored around the Fed's 2% target.
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