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PremiumUS Federal Reserve continues on its path of achieving maximum employment and an inflation rate of 2%. Accordingly, the central bank led by chair Jerome Powell has raised the target range for the federal funds rate to 5 to 5-1/4 percent. However, FOMC said, it is prepared to adjust the stance of monetary policy as appropriate if risks emerge. For further rate hikes, chair Jerome Powell the Fed will take a data-depended approach to determine the rate decisions ahead. He believes the US banks are sound and resilient.
The fact the stock market is having trouble trying to figure out where to go from here is an indication this was already priced in," Bloomberg reported quoting Scott Ladner, chief investment officer at Horizon Investments. Ladner said now going forward, investors want to know how much weight the Fed will put on tightening credit conditions that is emanating from regional bank stresses.
For us, this is the end of the hiking cycle, Ladner said. It would take some pretty disastrous inflation numbers for the Fed to hike again in June, he added.
Jay Woods, chief global strategist at Freedom Capital Markets said storm clouds still linger, Powell gave us what we expected, but he didn’t really give investors the language that said everything is clear and smooth sailing ahead. The regional banking crisis isn’t over. Despite what Powell said, he didn’t give us any guidance as to what the next moves from the Fed will be or an “all clear" signal. He didn’t panic about regional banks, but he didn’t reassure investors either.
The US Treasury yields edged lower after the Fed's signal that it could keep rates unchanged at the next few meetings.
Benchmark 10-year note yields were down 3.6 basis points to 3.403%, from 3.439% late on Tuesday. The 30-year bond yield was last down 1.9 basis points to 3.7128% while the 2-year note yield was last was down 3.9 basis points to 3.9407%, from 3.98%.
Regional bank stocks fell in the last 30 minutes as investors react to Fed Chair Jerome Powell’s press conference.
Shares of PacWest fell more than 7%, extending the bank’s heavy losses for the week. Zions Bancorp. slid 4.6%, and Western Alliance dropped 3.1%. The SPDR S&P Regional Bank ETF was down 0.6%.
The dollar fell on Wednesday after the Federal Reserve raised interest rates by a quarter of a percentage point and signaled it may pause further increases.
The dollar index was last down 0.42% on the day at 101.42, after hitting 101.05, the lowest since April 26. The euro gained 0.46% at $1.1047 after reaching $1.1093. It is holding just below a 13-month high of $1.1096 reached last week. The dollar also fell 1.02% against the Japanese yen to 135.15.
Stocks closed lower on Wall Street after the Federal Reserve announced its latest hike to interest rates and hinted that the end to them may be near.
The S&P 500 fell 0.7% after drifting between modest gains and losses immediately after the Fed’s announcement. The Dow Jones Industrial Average fell 0.8% and the Nasdaq lost 0.5%.
Chair Jerome Powell believes Fed rate hike and change in the statement is the right way to balance risks of not doing enough against the risk of slowing economic activity too much.
Also, he said, SLOOS is broadly consistent with banks tightening lending standards, and pace of lending.
He also said, “no one should assume the Fed can protect the economy from a failure to pay bills on time."
Jerome Powell said it will be an ongoing assessment whether Fed has reached sufficiently restrictive. Currently, Powell believes it is not possible to say with confidence if Fed has reached this. And hence, he said, the Fed "will revisit that at June meeting."
He added, "We are trying tp reach and then stay at for an extended period 'a sufficiently restrictive stance' to bring down inflation."
According to Jerome Powell, it is hard predict how much credit tightening will replace the need for any further rate hikes. He said, assessing the extent to which firmer policy will be needed will be ongoing, and meeting by meeting. But he also added that credit tightening complicates that assessment and adds uncertainty.
Before the May policy decisions, experts have predicted that the recent stress in banking systems are leading to tightening in lending conditions which is likely to do more for slowing down the economy than Fed's 25 bps rate hike.
US Fed's chair Jerom Powell said, "financial stability tools and monetary policy tools are working well together." He said, many banks are now attending to liquidity.
With effect from May 4, the FOMC directs to undertake the following:
- conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.25% and with an aggregate operation limit of $500 billion.
- conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.05% and with a per-counterparty limit of $160 billion per
day.
- roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.
- reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month.
- allow modest deviations from stated amounts for reinvestments, if needed for operational reasons.
- engage in dollar roll and coupon swap transactions as necessary to facilitate
settlement of the Federal Reserve's agency MBS transactions.
On staff forecast, Jerome Powell said, "staff forecast is independent of Fed." He added, "broadly the staff forecast was for a mild recession. Also that the forecast for this meeting from staff was broadly similar to March forecast.
In March policy meeting's minutes, it was indicated that several Federal Reserve staff considered a rate pause in March. This comes after the failure of Silicon Valley and Signature Bank on mid-March.
Since it has been cited that the banks' crisis issue was pointed out in a briefing on February 14 to the FOMC, Jerome Powell said, "The February 14 presentation was a general presentation on interest rate risks." He revealed that nothing in this briefing was hinted about the risk of a bank run.
Further, Powell revealed that there was one page on Silicon Valley in the briefing. Adding he said, "The staff was going to do a horizontal assessment of banks, not presented as urgent or alarming."
Addressing the bank consolidations move, Jerome Powell said, "it's good policy that we don't want largest banks doing big acquisitions, but acquisition of FRC is an exception, follows the law on least-cost bid."
The latest bank to fail would be First Republic Bank this week. And this time it is JPMorgan Chase at rescue by agreeing to acquire First Republic's substantial majority of assets including approximately $173 billion of loans and approximately $30 billion of securities.
Banks consolidation escalated in the US since mid-March this year after back-to-back failures of three banks which led to rescue from larger banks of regional banks. But Jerome Powell in the monetary policy conference said, bank consolidation has been going on for a while," however, he added that "don't have agenda for further bank consolidation."
Powell believes that having small, mediam and large banks is a great part of our banking system. It is healthy to have a range of different kinds of banks.
In the press conference, Powell said, "restoring price stability is essential." And hence he said, "a decision on a pause was not made today." But statement change was meaningful to which he added, "it is a meaningful change to no long say we anticipate more firming of policy."
Powell said, "Strains from banking systems in March are resulting in even tighter conditions." He added that extent of effects is uncertain.
But the Fed chair also said, "Our future policy actions will depend on how events unfold." He assured that the FOMC is prepared to do more if more is warranted.
Although the FOMC had brought up the matter of debt limit issue in the 2-day meeting, however, decision on this was not considered in the May policy despite it seen as a fiscal policy matter.
In the press conference, Powell said, "debt ceiling did come up in discussions." He revealed that FOMC talked about debt limit issue as a risk to the outlook. However, he added that the issue was not important in today's monetary policy decision.
Powell also cited debt limit issue as a fiscal policy matter. He said, "this is a fiscal policy matter for elected officials to deal with, "adding, "it is essential for debt limit to raised in timely way."
As per Powell, the country's labor market remains very tight. He added that there are some signs that supply and demand in labor market is coming back into better balance.
He said, " nominal wage growth has shown some signs of easing." Further, he said, "job vacancies have declined."
While addressing on debt ceiling, Powell said, "these are fiscal policy matters; from our side, it would be important that debt ceiling be raised in time and bills be paid in time."
According to Jerome Powell, the Fed will take into consideration a data depended approach to determine extent of further rate hikes.
The committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Jerome Powell in the conference said, "focus remains on dual mandate." These would be strongly committed to returning inflation to its 2% objective and secondly achieve maximum employment in the long run.
He said, "strongly committed to bringind inflation back down to 2%," adding, "without price stability will not achieve sustained strong labor market."
Fed's chair Jerome Powell in a press conference on Wednesday said, the conditions in the US banking sector have broadly improved. He added the banking system is sound and resilient.
In wake of failures of three lenders namely Silicon Valley Bank, Signature Bank and First Republic Bank, Powell said "committed to learning right lessons."
These banks failed due to illiquidity in their systems which was due to rate hike cycle that began in early 2022.
US Federal Reserve's chair Jerome Powell begins press conference after the committee hiked key fund rates by another 25 bps. He sheds some light on Fed's approach on further rate hikes, while saying US banking sector's condition has broadly improved.
In assessing the appropriate stance of monetary policy, Fed will continue to monitor the implications of incoming information for the economic outlook.
FOMC said, "the committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals."
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.
In wake of recent banking crisis in the US especially after the third lender First Republic Bank's failure, the FOMC in its monetary policy statement said, "the US banking system is sound and resilient."
FOMC's note added, "Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks."
-US Fed raises key lending rate by 25 bps, as expected
-Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4%
-Inflation remains elevated
-US banking system is sound and resilient
- To take into account the cumulative tightening of monetary policy
- To continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities
- FOMC would be prepared to adjust the stance of monetary policy as appropriate if risks emerge
- Economic activity expanded at a modest pace in the first quarter
- Job gains robust in recent months
- Unemployment rate has remained low.
Read here: US Fed hikes rate by 25 bps: Key takeaways from the FOMC statement
On Wednesday, US Federal Reserve committee reteriated that they will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
While hiking key funds rates by 25 bps, FOMC said it will closely monitor incoming information and assess the implications for monetary policy.
In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, FOMC will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Wall Street gives thumbs-up to Fed's another 25 bps rate hike on Wednesday. Dow Jones inched to near 33,747 after touching an intraday high of 33,810.32. While S&P 500 index gained by over 0.2% to near 4,132, near its day's high of 4,143.02.
Nasdaq Composite index jumped by over 0.6% to trade above 12,157. The index has touched an intraday high of 12,179.81.
Staying on its path to maximum employment and inflation at 2% in the long run, the FOMC decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent.
As investors positioned for Fed's interest rate decision, gold surged as US dollar weakened. Spot Gold jumped by 0.4% to $2,024.19 per ounce -- after clocking a fresh high since April 14. Also, US gold futures climbed by 0.5% to $2,033.50 per ounce.
With US banking crisis, gold prices have witnessed heavy demand as it gained by at least 1% in April month.
On Wednesday, the 10-year Treasuries declined four basis points to 3.38%. While the Germany’s 10-year yield tumbled one basis point to 2.25%. On the contrary, Britain’s 10-year yield picked up three basis points to 3.70%.
However, crude oil prices further extended losses with Brent Crude down by nearly 3% to $71.43 per barrel. US WTI slipped by 4% to $68.80 a barrel.
The countdown for FOMC's policy decision has begun. US Federal Reserve's committee led by chair Jerome Powell will announce key rates outcome at around 2 pm ET on Wednesday. Another 25 bps hike is expected in this policy, but chances of a surprise pause cannot be ruled out.
In the previous policy, despite two US regional banks Silicon Valley and Signature Bank's failure, the Fed raised key funds rates by 25 bps in the range of 5% to 5.25%. This is the highest level in federal fund rates since 2007.
Wall Street is currently performing with extended gains as tech-heavy composite index Nasdaq surges by 0.5%. While S&P 500 and Dow Jones picked up momentum.
Fed will announce its May policy decisions soon.
European market ended higher as speculations over Fed policy heightened. Also, the market was in focus ahead of ECB's monetary policy that is scheduled on Thursday coupled with earnings.
On Wednesday, pan-European STOXX 600 index ended higher by 0.3% to 462.51. This index had tumbled to its lowest level in a month in the previous session.
The simple answer for Fed to hike rate in May policy will be inflation. At present, US inflation eased for the ninth consecutive month in March to 5%, however, came in below market estimates. Inflation is still with greater gap above the Fed's target of 2%.
Fed aims at bring inflation down. By hiking rates, the central bank seeks to slowdown consumer pending --- and hence lowering demand for homes, cars and other goods and services.
However, Fed does acknowledged that hiking rates will bring some pain to credit portfolio.
In minutes of March meeting, Fed said, the credit quality of businesses and households was largely stable over the intermeeting period. However, measures of credit performance showed some signs of weakening. Leveraged loan credit quality deteriorated somewhat after the closures of Silicon Valley Bank and Signature Bank. Credit quality for residential mortgages remained unchanged
Global crypto markets tumbled by 1% to trade at $1.17 trillion on CoinMarketCap. Also, the volumes dipped by 4.32% to $35.13 billion currently. Bitcoin dipped by more than 1% to perform near $28,300. Ethereum slipped by 0.5% to around $1,852. BNB was down over 0.7%. While XRP, Cardano shed more than 2%, and Dogecoin plunged over 1.4%.
The markets traded volatile throughout Wednesday before entering deep selloff as Fed's key rates decision nears.
As per survey data, the services sector activity in the United States strengthened in April. New orders remained resilient and supply logistics improved. The S&P Global's services sector Purchasing Managers' Index improved from a reading of 52.6 for March to 53.6 in April.
After the announcement of decisions on key rates in May policy later on Wednesday, the US Federal Reserve chair Jerome Powell's live press conference can be watched here!
Wall Street opened in green on Wednesday as traders eye Fed's decision on key interest rates. However, the upside was at a slower pace indicating that investors were cautious as experts are split between another dovish 25 bps rate hike and a surprise pause in the hiking cycle.
At the time of writing, Dow Jones Industrial Average and S&P 500 indexes were marginally up to trade over 33,700 and 4,128. While Nasdaq Composite picked up to perform over 12,135.
According to Religare Broking:
- The on-going Q4 earning season will continue to dictate the trend of the markets.
- Management commentary, revenue growth and future plans as well as raw material trend along with margin improvement will be the key focus areas.
- Meanwhile volatility is expected to be high so investors should continue with their stock specific approach.
- Besides, FOMC meeting outcome, global cues, crude prices and currency movement will be on investor’s radar.
- Technically, indications are pointing in favor of the prevailing tone to continue. Improvement in participation from other key sectors like energy and IT is added positive.
- Participants should maintain their focus on accumulating quality stocks on dips.
Although, Fed's two-day meeting began on May 2nd. However, the committee will announce the monetary policy outcomes on May 3rd at around 2:00 PM ET which will be followed by Jerome Powell's press conference at around 2:30 p.m. ET.
Here are the key factors that FOMC may consider before declaring monetary policy outcomes today:
- US inflation still unacceptably higher than Fed's target of 2%. It stands at 5% as of March 2023.
- Banking stresses are leading to a tightening of lending conditions which may impact economy.
- Banks emergency borrowings from the Fed rose for a second consecutive week, up $11.3 billion to $155.2 billion the week ending 26 April.
- First Republic Bank's failure to be the third in the US.
- US job openings touch lowest level in 2 years to 9.59 million in March. The layoffs jumped to 1.8 million --the highest level since December 2020.
Read here: US Fed policy preview: FOMC may deliver a dovish 25 bps rate hike, will it be the last?
US regional banks traded on a volatile note on Wednesday as investors await Fed policy outcomes and commentary. The stocks have been under pressure after the third US lender First Republic Bank failure.
PacWest traded in the green with an upside of nearly a percent, while Western Alliance traded broadly flat and Metropolitan Bank dipped over 1.5%.
European Central Bank is scheduled to meet on May 4th to announce monetary policy outcomes.
According to Reliance Securities, the headline inflation rate in the eurozone rose in April, remaining significantly above levels targeted by the ECB. However, core price growth showed a surprise slowing. So, the data slightly may have blurred the outlook.
But the bank officials are still banging the inflation drum and suggesting interest rates must keep rising.
The brokerage said, the ECB meeting too comes ahead of the much-anticipated US Fed meet tonight, where the markets have priced in a 25 bps hike and possibly a pause or may even a rate cut as early as July.
As per the CME Fed Watch tool, 42% of the traders are factoring in a rate cut and 51% of the traders are factoring in a pause in rates. So, there is enough nervousness about a possible policy misstep.
Indian government bond yields on Wednesday tumbled on expectations of a dovish rate hike from FOMC later in the day. The 10-year benchmark yield dipped to 7.0057% which is the lowest level since April 7 last year. It is also the biggest drop in a single session since October 4.
US bond yields also dipped with the 10-year benchmark at 3.40%, while the two-year yield at 3.95%.
On Wednesday, traders dumped the US dollar ahead of a dovish hike from FOMC later in the day. Additionally, with gloomy job data, the stress in banking systems and a standoff over the US debt ceiling dampened the investment outlook.
On Tuesday, US job openings dropped in March to the lowest level since April 2021 to 9.59 million. This would be the third consecutive monthly fall in vacancies. While the layoffs reached their highest level since December 2020 to 1.8 million.
Ajit Mishra, VP - Technical Research, Religare Broking said:
With all eyes on the US Fed, we will see the reaction in early trades on Thursday. Besides, the scheduled weekly expiry would further add to the choppiness. Some consolidation can’t be ruled out in the index but the tone is likely to remain positive till Nifty manages to hold 17,850 levels. We thus reiterate our view to focus on stock selection.
