Federal Reserve Increases Interest Rates
As expected, the Federal Reserve increased interest rates but to a lesser degree than they might have if there was not a problem in the banking sector. Today’s quarter point increase was coupled by statements from the Fed that they expected to raise rates only one more time in 2023. This may suggest investing in fixed income will not be quite as risky as it has been in the past now that rates seem to be peaking.
It is our view that the Federal Reserve will be cautious in raising rates as there are deflationary pressures filtering through the economy. This includes problems in the banking sector that will decrease lending and have a negative impact on GDP.
We see the Feds action today as positive long-term for both the equity and the fixed income market.
"The Federal Reserve is raising its key interest rate 0.25 percentage point, underscoring central bankers' commitment to fighting inflation even if that heightens the financial pressure on the country's banks.
The Fed's benchmark rate is rising to a range between 4.75% and 5%, the bank's rate-setting body said Wednesday in a statement. That's the highest level for the federal funds rate since 2006.
The sudden collapse of Silicon Valley Bank on March 10 and of New York's Signature Bank two days later has spurred fear that worried depositors could rush to withdraw their money from other regional lenders, sparking a wider crisis.
Bank wobble leads Fed to back off
As recently as two weeks ago, the Fed appeared set for a steeper rate hike and prepared to keep them elevated for longer. But a a startling deposit run at Silicon Valley Bank, closure of two smaller banks and takeover of two others created panic in the financial system. Many economists, as well as the Fed, noted that banks' newfound caution following the turmoil would likely drag on the economy.”