Global markets are following a negative trend with rising concerns about the banking sector ahead of the Fed’s monetary policy decisions to be announced today and Powell’s promising guidance after the meeting.
As the end of the Fed’s “strict” policies, which began last year in the context of fighting inflation, is approaching, the U.S. banking sector is again alarming. On the money markets, it is estimated that the Bank will increase its policy interest rate by 90 percent, likely 25 bp, and end its “strict” policies.
In May 2023, the Federal Reserve is anticipated to increase the fed funds rate by 25 basis points to a range of 5%-5.25%, which would be the 10th increase and the highest level since September 2007. Investors will pay particular attention to any signs that the Fed is about to stop raising rates, with many betting that it may even lower rates by year’s end. Although inflation has been slowing and the economy is showing signs of stress, it is still more than twice the central bank’s target.
Banking Side increases sale pressure over markets
On the other hand, the revival of concerns about the banking sector in the country caused increased sales pressure on the stock markets yesterday. PacWest shares in regional banks fell by 30 percent, Western Alliance shares by 15 percent, and Metropolitan Bank shares fell by over 20 percent.
FED is expected to pause rate hikes in May, or one more?
In terms of macroeconomic data, the indications that the economy is cooling are becoming more evident, while the number of JOLTS Open Jobs in the United States fell by 9 million 590 thousand from 384 thousand the month before in March. The quantity of unfilled positions that fell short of market expectations hit its lowest point since April 2021. Even while factory orders in the nation increased by 0.9% in March, they fell short of forecasts.
Today, Fed’s monetary policy decisions and statements by Fed Chairman Powell will be followed by ADP’s private sector employment data in the U.S. (Timezone set to UTC+3)
Impacts of Rate Hikes on markets
Changes in interest rates have an impact on how consumers and businesses access credit to make critical purchases and make financial plans. As interest rates increase, the cost of borrowing money becomes more expensive. This makes buying certain goods and services, such as homes and cars, more costly. Customers spend less as a result, which lowers the demand for goods and services.
When consumer demand for goods and services declines, businesses reduce production, firing employees, which raises the unemployment rate. In general, the economy weakens when interest rates rise. The opposite is true when interest rates are reduced.