To provide some context, the Federal Reserve (FED) began hiking interest rates about a year ago in order to combat excessive inflation. This caused investors to expect the Fed to delay or perhaps reverse its rate hikes, causing markets to soar earlier this year.
Nevertheless, when inflation statistics came in stronger than projected, investor expectations shifted, and the FED's balance sheet expanded by $300 billion in a week as a result of the bank term financing programme (BTFP), which allowed banks to borrow money against their assets. This was perceived by investors as a sign that the FED might decrease interest rates, and markets rose once more.
During the March meeting, the FED's rate hike was in line with investor expectations, but the confusing messages from Jerome Powell during the press conference and the Fed's economic projections, along with other US government leaders, led the markets not to move much.
During the conference, Jerome Powel addressed the banking crisis, stating that the FED is prepared to utilise all of its capabilities to prevent a true banking crisis. Furthermore, he warned that bringing inflation down to the FED's aim would need a recession.
The FED decided on a 25 basis point increase, expecting that tightening lending conditions would result in another 25 basis point increase. The FED aims to raise and keep interest rates high for the foreseeable future, but future rate hikes will be determined by incoming economic data.
If inflation does not decline, the Fed will hike rates again, and banks will be able to use the BTFP facility to honour withdrawals even if their assets continue to depreciate. If the banking credit crisis occurs, the FED may not need to raise interest rates further, although this relies on the unemployment rate at the time.
The Fed is determined to keep interest rates high, but investors are concerned about the future.
Source:
Coin Bureau, 29 March 2023, "Banking Crisis or Inflation!? Pivotal Fed Press Conference!",