The Federal Reserve increased interest rates by a quarter of a percentage point on Wednesday, but it also signaled that it was about to halt future rises in borrowing costs due to recent market upheaval brought on by the failure of two U.S. banks.
The action placed the benchmark overnight interest rate for the U.S. central bank between 4.75 percent and 5.00 percent.
But, the Fed’s most recent policy statement no longer states that “ongoing rises” in rates would likely be appropriate, signaling a significant change brought on by the unexpected collapses this month of Silicon Valley Bank (SVB) and Signature Bank.
Before to the Fed announcement, the three main U.S. stock indices were mostly lax; but, following the announcement, as investors processed the raise and the accompanying statement, the indices went upward.
Dealers disagreed on whether the U.S. central bank would be need to halt its rate hike cycle as American authorities urgently look for methods to strengthen financial stability while also addressing the issues confronting First Republic Bank.
Despite stating that the U.S. banking system is “sound and resilient,” the Federal Open Market Committee’s policy statement also stated that recent stress in the banking industry is “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”
The largest banking sector catastrophe since the 2008 financial crisis is attributed, among other things, to the Fed’s unrelenting rate increases to control inflation.
The most recent action to soothe tense regional bank stock prices occurred when Pacific Western Bank, one of the local lenders affected by market turbulence, said it had received $1.4 billion from investment company Atlas SP Partners.
Even as the bank attempted to allay investor concerns by stating that it has more than $11.4 billion in cash as of March 20, its shares, which have lost over 47% of their value this year, were down more than 10% in afternoon trade.
Yet Luke Ellis, the Head of hedge fund Man Group, said that the crisis was far from finished and foresaw further bank collapses less than two weeks after Silicon Valley Bank collapsed under the weight of bond-related losses brought on by rising interest rates.
Government officials have emphasized that the current unrest is different from the crisis 15 years ago since banks are more capitalized and cash are more readily accessible.
The fall of SVB marked the beginning of a turbulent 10-day period for banks, which culminated in competitor UBS’s weekend $3 billion ($3.2 billion) acquisition of Credit Suisse.
Although the damaged banks stocks received some relief from that sale, First Republic is still very much in the public eye. Three persons with knowledge of the situation indicated that the US lender is considering methods to reduce itself if it is unable to secure additional capital.
The price of First Republic’s shares fell 2.3% on Wednesday afternoon despite a partial recovery.
Major bank CEOs met in Washington for a planned two-day conference beginning on Tuesday, according to individuals familiar with the situation, and scenarios for the bank were being explored.
The Fed’s post-meeting press briefing was anticipated to focus heavily on banking sector ructions even though it has said that its examination of SVB’s supervision would be done by May 1.
As a result of the collapses of SVB and Signature Bank, a conservative Republican and a progressive Democrat are drafting legislation in the U.S. Senate to replace the Fed’s internal watchdog with one chosen by the president.
Republican Rick Scott and Democrat Elizabeth Warren attributed the failure of the two banks’ regulatory oversight on the actions of the Federal Reserve, which up until this point had been run by an internal inspector general who is accountable to the Fed board.
The Fed could not be reached for comment right away.
A NEITHER EVENT?
A day after the ECB advised banks not to be caught off guard by increasing rates, senior officials at the European Central Bank said they would keep an eye out for indications of stress in bank lending.
The ECB’s chief economist, Philip Lane, said market jitters may turn out to be “a non-event” for monetary policy, while a full-blown crisis that completely rewrites the outlook is unlikely. Investors are unsure whether the ECB will be able to continue raising its own interest rates to combat inflation.
Shares of European banks and U.S. lenders have increased as a result of the rescue of Credit Suisse, which seems to have allayed the biggest concerns about systemic contagion.
Prior to Lane, ECB President Christine Lagarde said that the central bank may not need to take as much action if banks began to demand higher rates while lending, which would increase the impact of rate increases.
Despite this, investors significantly bet that the Bank of England would increase interest rates by at least another 25 basis points on Thursday as a result of an unexpected increase in UK inflation last month.
WIPEOUT
Bank debt markets have been rocked by Credit Suisse’s Additional Tier-1 (AT1) investors losing everything.
Nonetheless, one of the biggest holders of Credit Suisse bonds said that he continues to believe in the worth of contingent convertible debt, or CoCos, as well as the “bail-in” scheme designed to preserve banks deemed to be too large to fail.
UBS said on Wednesday that it will buy back 2.75 billion euros ($2.96 billion) of debt it issued less than a week ago in an effort to restore investor confidence that had been shaken by its $3 billion Credit Suisse bailout.
According to Jerome Legras, head of research at Axiom Alternative Investments, they are attempting to be accommodating to investors who made their purchases immediately before the debacle.
