Despite bank turmoil, Fed raises rates and keeps forecast for one more hike

By: Miguel A. Rodriguez

09:45, 23 March 2023

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As expected, the US Federal Reserve (Fed) rose interest rates by 25 basis points and is not expected to cut rates until next year. On this news North American stocks shot up only to fall again later and end the day in the red like bond yields. 

In anticipation of the Fed’s interest rate decision, most of market session yesterday was relatively. 

The Fed increased interest rates by 25 basis points at the end of the day in Europe, just as most investors had expected, but the dot plot, which depicts how the officials of the Federal Open Market Committee (FOMC) estimate the future of interest rates, was more dovish than last time. Now their predictions show a further increase of 25 basis points for this year, but reductions of 75 basis points next year. It is also predicted that by the end of the year, the Fed’s market swaps discount reference rates will be close to 4%. 

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Long-duration bond rates were almost constant after the decision was announced since the Fed's balance sheet reduction policy was not altered. Due to predictions of interest rate reductions for the following year, the yields of the 2-year bond, the shortest duration bond, decreased. However, due to predictions of interest rate reductions for the following year, the yields of the 2-year bond, the shortest duration bond, decreased. Due to the banking crisis, part of the market expected the Fed to announce a slower pace of balance sheet reduction.  

All in all, it can be said that the Fed has been more dovish, without going as far as to cut interest rates at this meeting, as some investment banks predicted.  

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At the press conference, Fed chief, Jerome Powell, acknowledged that the labor market is still overly robust and that inflation is still far from reaching desired levels. He did, however, say that recent events in the banking sector will likely lead to a decision to tighten the regulation on banks, which will probably have a negative bearing on credit and, consequently, on the economy. This could help to reduce inflation and stop the labor market from being as tight as it is now.  

As a result of these predictions for future lower interest rates, the North American stock indices initially surged, but then reversed and finished the day in the red, much like bond yields, perhaps due to the deteriorating economic outlook. 

The US Dollar was sold against all other currencies, and throughout the session, the EUR/USD pair rose beyond the 1.09 mark, helped by Christine Lagarde's remarks from the previous day, in which she said she did not rule out higher interest rates in the eurozone.   

 

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Sources: Bloomberg, Reuters  

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