Resolution of the day by Powell-Corriere.it

Keeping interest rates unchanged would have been riskier than raising them, so forced to deal with the fallout from the banking crisis and inflation still well above its 2% target over the medium term, the Fed announced an increase of 25 basis points. The ninth increase in a row, bringing key interest rates in the United States to the range of 4.75-5%, the highest level since September 2007. Before the banking crisis, analysts were betting on an increase of 50 basis points, as the head of the Federal Reserve himself, Jerome Powell He hinted in his testimony before the US Congress two weeks ago.

Orientation change

Leaving interest rates unchanged indicated that the problems of US banks are deeper than you think. Instead, the US banking system is healthy and resilient, says Federal Reserve Chairman Jerome Powell, explaining that recent developments will likely lead to a credit crunch for businesses and households and will affect economic activity, the labor market and inflation. As if the credit crunch, triggered by the bankruptcy of three US lenders in one week, was doing the job of the central bank, calming the economy. But it’s still too early to quantify the implications, because there is so much uncertainty. So if the Fed tightening is not over, because inflation is still high, the news is that the Fed is changing its value guidance: It will no longer anticipate increases, but will assess whether the next increases are appropriate in light of the new scenario. Powell simplifies: maybe more hikes. How to say: The Federal Reserve will continue to fight inflation, until it drops to 2%, but it is ready to adjust its monetary policy, if new unexpected effects emerge from the banking crisis, Which saw the failure of three American institutions in one week. But the unexpected rate cut.

Banking crisis

The demise of Silicon Valley Bank (SVB), the second largest failure of a US bank since 2008, sent US regional banks into a rush. While abroad, the quick bailout of Credit Suisse, which was bought by Ubs on Sunday March 19th for CHF 3 billion, was broadcast. Svb Powell concedes that his management has seriously failed, but reassures that these are not weaknesses that extend to the entire banking system, because Svb was a very special case, with clients concentrated in one sector, the startup tech sector, who all know each other. This made it easier The bank works Which saw $42 billion in deposits withdrawn in one day, marking the end of Svb. He said that after bankruptcy, it is clear that we must strengthen supervision and rules over banks, recalling that a review is underway to understand what went wrong. But we do have the tools to protect depositors.

Revised estimates of GDP and inflation

Also yesterday, the US central bank updated its economic estimates, which are less positive than those published in December. US GDP will grow by only 0.4% this year (+0.5% December forecast) and by 1.2% in 2024 (+1.6%), while the forecast for 2025 remains unchanged +1.8%. As for inflation, it will remain at 3.3% in 2023up from the 3.1% estimated in December, to drop to 2.5% in 2024 and finally to 2.1% in 2025. Even for so-called core inflation, which excludes the volatile component of energy and food, estimates have been revised upwards for both this year ( +3.6% compared to the previous year +3.5%) and in 2024, estimated at +2.6% from +2.5%.

Wall Street reaction

Markets disappointed. Powell’s words prompted Wall Street is in the red (-1.63% Dow Jones, -1.6% Nasdaq) and led to lower yields on US government bonds, while the dollar weakened. Notably, shares of First Republic Bank, the California regional bank victim of a post-SVB bank outflow, closed at $13.33: on March 8 they were worth $115. According to rumors in the American press, the institute hired Lazard as a consultant and McKinsey for strategic planning, to work alongside JPMorgan to explore possible rescue scenarios.