FED raises interest rates in its commitment to lower inflation

WITHOUT DISSIPPING the fear that new banks could collapse, precisely as a result of the drop in their operations due to high interest rates to cool the economy, the US Federal Reserve (FED, central bank), not only readjusted its rates by a quarter of a percentage point of reference, but rather anticipated that it will maintain that upward path.

Thus, the FED, although moderately raised said interests to the range of 4.75 – 5%, as expected by the market and maintained that it will continue to do so until the rise in prices is subdued and inflation returns to the 2 percent target.

The Federal Reserve maintained when explaining its decision that problems in the banking sector “are likely to result in tighter credit conditions for households and businesses, and could weigh on economic activity, employment and inflation.”

And he emphasized that “the extent of the effects (of the banking crisis) is uncertain,” although he also reaffirmed that “the US banking system is strong and resilient.”

Jerome Powell, president of the FED, indicated at a press conference that all the money of savers in the United States is “safe” and that the entity will draw “lessons” from this episode, as well as that it will call for strengthening banking supervision.

When determining the new increases -explained the official- the progressive tightening of monetary policy, the “delayed effects” of monetary policy on economic activity, inflation and the financial sector will be taken into account. In addition, “the Fed is prepared” to “adjust” its monetary policy if “risks emerge that prevent the achievement of the Committee’s objectives.”

Following this announcement by the Federal Reserve, the New York stock market fell sharply at the end of the session. After holding up during the day, the indices fell minutes before closing: the Dow Jones finally lost 1.63%, the technological Nasdaq 1.60% and the S&P 500 1.65%.

The dollar, meanwhile, lost 1.05% against the euro. Traders saw the announcement as a sign of easing.

The Fed held its March meeting in the midst of a dilemma: continue raising its monetary policy rate to try to contain inflation by making credit more expensive and thus containing consumption and investment, or pause to avoid a worsening of the difficulties experienced by some banks exposed to rising interest rates.

The market went from expecting a strong rise of half a percentage point in rates after statements by the president of the agency, to predicting stable rates after the outbreak of the banking crisis with the bankruptcy of three financial institutions in less than a week in the United States.

The bankruptcy of regional banks Silicon Valley Bank (SVB), Signature Bank and Silvergate created a wave of concern. Governments, central banks and regulators intervened urgently to try to restore confidence in the system and avoid contagion.

Likewise, the Credit Suisse bank, which had already been in difficulties for years, was shaken and was bought last Sunday by its compatriot UBS.

The Fed lent about $164 billion to banks in about ten days so that all customers who want to withdraw their money can do so. In addition, it lent 142.8 billion to the two entities created by US regulators to manage the assets and resources of SVB and Signature Bank.

These credits raised its balance sheet, which it had been trying to reduce since last June.

The Fed was under pressure since the fall of these banks was largely due to very fast and very strong rate increases, which reduced the value of the assets of these institutions.

In addition, the European Central Bank increased its rates by half a percentage point a week ago, ensuring that inflation is its number one priority.

In the United States, 12-month inflation eased in February to 6%, according to the Consumer Price Index (CPI).

new forecasts

On the other hand, the FED updated its macroeconomic forecasts, as well as the estimates of its members on the evolution of interest rates.

The ‘dot-plot’, or diagram of points, has not changed in a bulky way with respect to December. In the last month of 2022, most members of the Federal Reserve Committee expected rates to be between 4.5% and 5% at the end of this year. Now, however, a large majority expects them to be at least above 5%.

Looking ahead to 2024, there is a clear dispersion between those who expect the price of money to be above 5% and those who estimate that it will be in the range of 4% to 5%, a preference, even so, for a greater part of members.

The central projection of the issuing institute indicates that interest rates will be between 5.1% and 5.6% in 2023, similar to the 5.1% and 5.4% projected in December. For 2024, the forecast is for the range to be between 3.9% and 5.1%, compared to the previous forecast of between 3.9% and 4.9%.

As for macroeconomic developments, the Fed has worsened its outlook. Thus, it has reduced the country’s GDP growth to 0.4% in 2023, compared to the 0.5% estimated in December. Likewise, the growth forecast for 2023 has also been reduced by four tenths, to 1.2%, while that of 2024 has increased by one tenth, to 1.9%.

Regarding unemployment, the Fed estimates that the country will end the year with an unemployment rate of 4.5%, one tenth less than the estimate three months ago. In 2023, unemployment will stand at 4.6%, unchanged. In 2024, the adjustment has added one tenth more, and the unemployment rate will be 4.6%.

The US labor market created 311,000 jobs during the month of February. On his side, unemployment rose two tenths to 3.6 percent, according to the Bureau of Labor Statistics of the Department of Labor.

In this way, unemployment in the US moved away from the minimum registered in January, when 517,000 jobs were created and unemployment reached 3.4 percent, which was its lowest rate since 1969.

The economy of the first world power experienced an annualized growth of 2.7 percent of its GDP in the fourth quarter and 2.1 percent in the whole of 2022, revealed the Bureau of Economic Analysis (BEA, for its acronym in English).

Likewise, the personal consumption spending price index, the variable preferred by the Fed to monitor inflation, stood at 5.4 percent year-on-year in January and four tenths more than the previous month. The monthly rate registered an expansion of 0.6 percent, five tenths more.

The underlying variable, which excludes energy and food prices from its calculation due to their greater volatility, stood at 4.7 percent, three tenths more.

On the other hand, the plans to reduce the Fed’s balance sheet remain unchanged, reinvesting the principal of the debt that matures, with the exception of 95,000 million dollars each month, between Treasury bonds and mortgage securities./International writing with agencies


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