Rabu, 22 Maret 2023

Markets brace for Federal Reserve interest rate decision – business live - The Guardian

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The US Federal Reserve is raising interest rates by a quarter point, pushing rates to 4.75% to 5%, the highest rates since 2007.

The much-anticipated announcement comes amid the banking crisis that has appeared in the aftermath of Silicon Valley Bank’s collapse. With economic uncertainty, the Fed was under pressure to pause its interest rate increases given the volatility of the economy.

But Fed chair Jerome Powell has been hawkish on his goal to get inflation down to 2% (it stood at 6% in February). Powell is expected to speak at 2:30 pm at a press conference, where he will likely expand on the rationale behind the interest rate increase and is expected to take questions from reporters.

In a statement, the Federal Open Market Committee, which sets interest rates, said:“Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.”

“The US banking system is sound and resilient,” the committee noted. “The committee remains highly attentive to inflation risks.

Even with today’s big announcement on interest rates, the US Federal Reserve – especially chair Jerome Powell – has attracted scrutiny over the last few weeks over the bank’s regulation of Silicon Valley Bank (SVB).

Powell is scheduled to hold a press conference today at 2.30pm ET where he will likely be asked questions about the Fed’s handling of SVB. Reports have said SVB was under Fed scrutiny, with a group of Fed supervisors in San Francisco issuing warnings about the company’s risky management. The bank was under supervisory review starting this past summer. Some question whether the Fed could have acted more aggressively.

Powell specifically has been on the receiving end of criticism, notably from senator Elizabeth Warren, who on Sunday said Powell “failed” as chair given his role in deregulating banks and hawkishly raising interest rates.

“Jerome Powell has said that all he wants to do is lighten regulation on the banks. I opposed him as chairman of the Federal Reserve Bank precisely for that reason,” she said. “I said he was a dangerous man to have in this position.”

Hello and welcome to the business live blog. This is Lauren Aratani in New York taking over for Graeme Wearden.

Just over two weeks ago, US Federal Reserve chair Jerome Powell told Congress that he intends to increase interest rates, which currently stand at 4.5% to 4.75%.

Powell has been hawkish on the historic levels of inflation over the last year. Inflation in February was 6%, a sizable decrease from June’s 9.1%, but nowhere close to Powell’s goal of 2%. “We’re strongly committed to returning inflation to our 2% goal,” he told Congress.

But things have certainly changed since Powell sat before Congress. The global economy has been dramatically shaken by the fall of Silicon Valley Bank, whose risky decisions were proved ill-fated as interest rates continued to rise.

The US Federal Reserve is now set to make a key announcement this afternoon on whether it will raise interest rates, a move that could further shake global markets after two weeks of turmoil in the aftermath of Silicon Valley Bank’s collapse.

Some economists expect the central bank to increase rates by a quarter point – what would likely be a compromise from the half-point increase Powell was likely eyeing before the banking crisis. Others have argued that Powell should pause rate increase given the instability of the economy.

The uncertainty over how the central bank will act is seen in the stock market, which is currently unmoving as investors await the announcement, which will come at 2pm ET (6pm GMT).

Powell is also set to deliver remarks along with announcing any changes to the interest rate.

We’ll be covering the Fed’s announcement this afternoon live, so stay tuned for more updates.

Tension is mounting as the US Federal Reserve prepares for an extremely eagerly anticipated interest rate decision.

The Federal Open Market Committee will announce under in an hour’s time whether it has pressed on with its monetary tightening push by raising borrowing costs, or pressed pause on its rate hikes.

The Fed’s target interest rate is currently set to a range of 4.5 to 4.75%.

At 2pm New York time, or 6pm in the UK, we’ll learn what the FOMC have decided.

The Fed must weigh up two competing concerns. One is inflation – US consumer prices rose by 6% in February, compared with a year ago.

The Fed’s preferred inflation measure, the personal consumption expenditures price index, rose 5.4% from a year earlier in January while core PCE was up 4.7%, sharply above its inflation target of 2%.

Earlier this month, Fed chair Jerome Powell told Congress that the central bank could increase the size of its interest rate hikes and raise borrowing costs to higher levels, due to inflationary pressures. That led the markets to anticipate a half-point rate increase at this month’s meeting.

On the other hand, the US banking sector is in the worst turmoil since the 2008 financial crisis. The Fed’s existing rate increases have hit bond prices, leading to the crisis at Silicon Valley Bank which took losses on securities it had bought at the peak of the market.

As Robert Reich, a former US secretary of labor, wrote this week:

Higher rates could imperil more banks, especially those that used depositors’ money to purchase long-term bonds when interest rates were lower, as did Silicon Valley Bank.

That means that raising interest rates could cause more runs on more banks. The financial system is already shaky.

The two objectives – fighting inflation by raising rates, and avoiding a bank run – are in direct conflict. As the old song goes: “Something’s got to give.” What will it be?

The sensible thing would be for the Fed to pause rate hikes long enough to let the financial system calm down. Besides, inflation is receding, albeit slowly. So there’s no reason to risk more financial tumult.

But will the Fed see it that way?

My colleague Lauren Aratani will take the blog over, to cover all the action.

Here’s a catch-up of today’s main stories so far, as the financial markets brace for the US Federal Reserve’s interest rate decision in less than 90 minutes time.

The City of London is expecting the Bank of England to raise interest rates to 4.25% tomorrow, after a surprise jump in UK inflation last month.

A quarter-point hike at noon on Thursday is seen as a 92% chance, after inflation surged to 10.4% in February due to high energy costs, food and clothing.

But, some economists predict the BoE could leave interest rates on hold.

High inflation, and the problems in the banking sector, are creating a dilemma for central banks:

And in other news, Switzerland is reeling from the rescue of Credit Suisse by UBS last weekend:

Amazon workers in the UK are planning further strike action as they dismissed as “an insult” a 50p an hour increase to its minimum hourly pay for warehouse workers to £11.

The Swiss pharmaceutical firm Novartis has ditched plans for a large clinical trial in the UK, in a further blow to the government’s efforts to make Britain an attractive place for research and investment after Brexit.

The former chief executive of the housebuilder Persimmon – famous for landing one of the biggest bonuses in British corporate history – has set up a new venture with his wife.

The boss of British Gas’s parent company has angered consumer groups by accepting a windfall £4.5m pay packet, including bonus payouts totalling £3.7m, despite an investigation into the treatment of vulnerable customers.

The International Monetary Fund has agreed a package of support for Ukraine worth $15.6bn (£12.8bn).

More than 2 million people have been contacted by bailiffs during the cost of living crisis, according to Citizens Advice, with a majority of those who came into contact with a debt collector reporting they felt harassed or intimidated.

Nick Leeson, the former rogue trader who caused the collapse of Barings Bank 28 years ago, has joined a firm of corporate private investigators.

And John Lewis may find it is fishing in an extremely small pool, if the retailer looks for like-minded investors….

In the City, the FTSE 100 share index has shrugged off the jump in UK inflation last month.

The FTSE 100 has ended the day at a one-week closing high of 7,566 points, up 30.6 points or 0.4%.

That’s its third daily gain in a row, as the rescue of Credit Suisse last weekend calms the markets.

Grocery technology firm Ocado (+1.95%) topped the risers, followed by banking giant HSBC (+1.9%).

The International Monetary Fund, the global lender of last resort, has agreed a package of support for Ukraine of $15.6bn (£12.8bn).

The loan, the first the Washington-based lender will make to a country at war, could represent one of the biggest tranches of financial support for Ukraine so far. It still needs to be signed off by the IMF’s executive board, a process that should conclude within weeks.

War had taken a “horrific humanitarian toll” on Ukraine, said Gavin Gray, the IMF’s mission chief for the country, but it also “continues to have a devastating impact on the economy”.

Ukraine’s economic output – GDP – shrank by 30% last year and poverty levels have risen significantly. Pressure on public spending to support the economy and manage its war effort is considerable.

Gray said:

“The authorities have nevertheless managed to maintain macroeconomic and financial stability, thanks to substantial external support and skilful policymaking.”

The pound would likely suffer a sharp sell-off if the Bank of England does not proceed with a 25bp hike in interest rates tomorrow, warns Matthew Ryan, head of market strategy at global financial services firm Ebury.

Ryan says:

“We expect the Bank of England to press ahead with a 25bp rate increase on Thursday, with the hotter-than-expected February UK inflation print effectively sealing the deal for another hike, in our view.

“For one, Britain is relatively isolated from the recent global banking troubles, and fears surrounding contagion have eased significantly in the past few days. Indeed, we think that the banking failures have been one-offs, driven by poor management decision making, rather than necessarily any systemic issues. Equity markets have rebounded, as have sterling and short-dated UK bond yields, indicating that investors are not unduly worried about the situation.

UK core inflation also remains sticky, and economic activity data has continued to hold up rather well, particularly on the labour market.

Asked about the UK’s productivity prospects, OBR chair Richard Hughes points out that all countries have seen a slowdown in productivity growth.

Since the financial crisis, the UK has been ‘quite successful’ in getting people into the labour force, boosting output that way, he says.

But…”we’ve been less successful in getting output per hour” to recover.

The budget does make a ‘meaningful impact’ on some of the economic challenges the UK faces, adds Richard Hughes.

The OBR chief points to attempts to lift labour participation side, which the watchdog thinks will lift the number of people in work in five years time by around 110,000.

However, that is against the 500,000 people lost from the workforce since the pandemic.

Hughes says:

So it by no means reverses that effect, but it makes a meaningful difference… to making up for some of the shortfall.

OBR chair Richard Hughes says we shouldn’t get “too preoccupied” about whether the UK falls into a technical recession (which the forecaster no longer expects).

A technical recession means GDP falling for two quarters in a row.

Even if that doesn’t happen, Hughes says the UK still faces “quite a tough economic outlook” because living standards are much lower (with a record fall expected).

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2023-03-22 18:01:15Z
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