FED Chooses Rate Hike Over Pause

Less than a month after the collapse of Silicon Valley Bank, marking the second largest bank failure in U.S. history, the Federal Reserve continued its “most aggressive monetary policy tightening cycle” in 40 years, voting unanimously to increase its target for the federal funds rate by 25 basis points.

The Federal Open Market Committee (FOMC) decided to hike rates by a further quarter percentage point to a range of 4.75% to 5%, bringing the federal funds rate to its highest level since September 2007. Following a series of aggressive rate hikes amidst a highly restrictive stance adopted by the Federal Reserve, Jerome Powell’s latest rate hike marks “the second straight increase of 25 basis points.” Despite the Federal Reserve maintaining its restrictive stance and emphasising that “inflation remains policymakers’ top concern,” Powell informed market participants that committee members had considered a potential pause in rate hikes “in the days running up to the meeting.” However, despite the collapse of Silicon Valley Bank strengthening the case for rate caution, inflation reports remain hot, with annual CPI coming in at 6% for January, well above the Federal Reserve’s desired target range. With “payrolls rising by more than 800,000” since the beginning of the year, pointing to a persistently tight labour market, it is seemingly apparent that inflation remains sticky. 

Despite Jerome Powell rejecting the potential for rate cuts, futures markets forecast the commencement of cutting rates “as soon as this year” while the U.S. Dollar Index ticked down marginally. Amidst what many consider a “potential banking crisis”, all eyes remain on how the FED plans to evolve its stance in a heated battle against inflation. 

Sources: Bloomberg, CNBC, Trading View

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