US investors liked, and then reversed their approval of, the 0.25% rate rise from the Federal Reserve and the reasoning the health of the economy remains the primary concern. But they baulked at separate comments from US Treasury Secretary Janet Yellen that the Biden Administration was not looking at insuring all bank deposits.
Wall Street fell out of bed as US investors didn’t like the prospect of more easy money being withheld before they could get their hands on it – even if it is US government policy.
Local investors followed their lead and the ASX 200 closed down 0.67% at 6,968.60.
The Fed decision was in fact what the market had been looking for from the central bank.
Along with its ninth hike since March 2022, the Federal Open Market Committee noted in its post meeting statement that future increases are not assured and will depend largely on incoming data.
“The Committee will closely monitor incoming information and assess the implications for monetary policy,” the post meeting statement said.
“The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
That lifted Wall Street briefly and then the detail and Powell’s media conference comments kicked in and the quarterly forecasts from the Fed, released in the wake of the rate rise announcement, proving to be inconclusive, investor confidence sagged and shares sold off.
And Treasury Secretary Yellen’s to the Senate at roughly the same time intruded and turned attention.
The yield on the two-year Treasury bond, which tends to track expectations for the Fed, tumbled to 3.96% from 4.13% just before the projections were released. It was above 5% earlier this month. The yield on the key 10-year bond fell 16 points to 3.44%.
Those falls told us more than the share price falls, about the outlook for the US economy – back to fretting about inflation, growth and jobs and financial stability (ie, Fed aid to banks, or more ‘free’ money) on the back burner or on a watch-and-act basis.
As investors ploughed through the forecasts and the implications of the dot plot (which shows where members of the Open Market Committee see rates rising) there was the inevitable confusion, which Fed chair Jay Powell nicely captured.
“We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so, that will bring inflation down to 2% over time. It is important that we sustain that confidence with our actions, as well as our words,” Powell said.
“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” the central bank leader said at his post-meeting news conference.
The dot plot hints as to where the bumps might be, revealing that seven of the 18 Fed officials see rates going higher than the 5.1% “terminal rate”, a divergence that worried some investors and economists.
The next two years’ worth of projections also showed considerable disagreement among members, reflected in a wide dispersion among the “dots.” Still, the median of the estimates suggests to a 0.8 percentage point reduction in rates in 2024 and 1.2 percentage points worth of cuts in 2025 (2% all up by the end of 2025).
That divergence was underlined by tweaks to the main economic forecasts – inflation is now forecast to be higher than estimated last December and growth slower.
Inflation is estimated at 3.3% for this year, compared with 3.1% in December. Unemployment was lowered a notch to 4.5%, while the outlook for GDP nudged down to 0.4% from 0.5% forecast last December.
The estimates for the next two years were little changed, except the GDP projection for 2024 came down to 1.2% from 1.6% in December.
No mention of recession, though that 0.4% GDP estimate for this year is looking very thin, especially as the Fed’s GDP tracker (compiled by the boffins at the St Louis Fed) shows growth running at 3.2% for the current March quarter with a strong jobs market, a jump in house sales and rising credit card transactions (but lower retail sales).
A worry is that too much pressure on the banking system, particularly among the smaller and mid-sized banks at the centre of investors’ crosshairs, would mean fewer loans made to businesses across the country. That in turn could mean less hiring and less economic activity, raising the risk of a recession that many economists already see as high.
Powell did acknowledge that the recent events in the banking system were likely to result in tighter credit conditions as did the post meeting statement. Powell said such a pullback in lending could act almost like a rate hike on its own. And that was one of the reasons the Fed opted to raise by only 0.25 points Wednesday instead of 0.50 points.
He also said that he sees the banking system overall as strong and sound, echoing the statement.
“The U.S. banking system is sound and resilient,” the committee said. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”
Inflation got the final mention in that comment and remains the central interest for the Fed, as it did last night for the Bank of England after UK consumer inflation bounced back 10.4% in February, up from 10.2% in January.
UK month on month inflation rose 1.1% last month against the 0.8% rise in January. No wonder the Bank of England is nervous.
