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USA. Interest Rates – March 2023. Reaction to Wall Street

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Wall Street’s major indices fell sharply. This is the aftermath of the Fed’s decision to raise interest rates by 25 basis points. Investors reacted to the words of the president of the Federal Reserve that the problems of the banking sector may translate into the condition of the American economy.

Dow Jones Industrial closed down 530 points, or 1.63 percent. and amounted to 32,030.11 points.

The S&P 500 fell 1.65% at the end of the day. and amounted to 3936.97 points.

The Nasdaq Composite fell 1.60%. and closed the session at 11,669.96 points.

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US interest rates up – Fed decision

US interest rates up The Fed raised its key rate by 25 basis points. The federal funds rate range was raised to 4.75-5.00 percent. The decision on interest rates was in line with market expectations and was taken unanimously. In the current tightening cycle, the Fed raised interest rates. in total by 475 bps. interest rates in the US are the highest since 2007. The Fed said that an additional tightening of monetary policy in the US may be appropriate.

The Fed said that the US banking system is resilient, but the recent tightening of financial conditions may have an impact on GDP growth. In addition, the Fed presented new quarterly macroeconomic projections and a dot-plot showing the forecast of the path of interest rates according to Reserve members.

The FOMC forecasts interest rates in March. at the level of 5.1 percent. at the end of 2023, 4.3 percent. at the end of 2024 and 3.1 percent. at the end of 2025. In December, the Fed forecast that interest rates in the US will be at 5.1 percent. at the end of 2023, 4.1 percent. at the end of 2024 and 3.1 percent. at the end of 2025. The median of forecasts regarding expectations regarding interest rates in the long term, i.e. the so-called neutral interest rate, amounted to 2.5 percent in March. against 2.5 percent in December.

Additional monetary policy tightening may be appropriate, Fed Chairman Jerome Powell said at a press conference after the Federal Reserve meeting. Powell added that when making subsequent decisions on interest rates. The Fed will assess the effects of the current tightening on the credit market.

– Since our last FOMC meeting, economic indicators have generally been better than expected. However, we believe that developments in the banking system over the past two weeks are likely to translate into tighter credit conditions for households and businesses, which in turn will translate into economic performance. It is too early to determine the extent of these effects and too early to say how monetary policy should react, said Jerome Powell.

– As a result, we no longer state that we expect successive interest rate hikes to be adequate to suppress inflation. Instead, we anticipate that additional policy tightening may be appropriate. We will closely monitor incoming data and carefully assess the actual and expected effects of tightening credit conditions on economic activity, the labor market and inflation. And our policy decisions will reflect that assessment,” he added.

Powell informed that when making subsequent decisions on interest rates. The Fed will assess the effects of the current tightening on the credit market.

– We assess that the events of the last two weeks are likely to cause some tightening of credit conditions for households and enterprises, and thus affect demand in the labor market and inflation. Such a tightening of financial conditions would work in the same direction as interest rate hikes. In principle, you can think of it as the equivalent of an interest rate hike, maybe even more. Of course, such an assessment cannot be made today with any precision.

The FOMC chairman indicated that Fed members still do not think that interest rate cuts may take place this year.

Even before the announcement of the decision by the Fed, analysts indicated that the US central bank was in a difficult situation.

US interest rates up – market reaction

“The Fed has a tough job ahead of it as concerns about the financial system intensify. While the central bank is likely to continue its hike cycle with a move of 25 basis points, we believe the guidelines for future meetings will be much more open. Data will take center stage and the Fed will need to see significant progress in fighting inflation as well as taking into account the ongoing risks to the economic outlook, said Gabriele Foa, co-portfolio manager at Algebris Investments.

“The markets are very aware that the Fed is between a rock and a hard place, and bankers face an obvious dilemma between financial stability and price stability. If the dot-plot shows a terminal interest rate higher than the 5.1 percent forecast by FOMC members in December, such hawkish attitude could trigger another wave of risk aversion in the stock market, added Han Tan, chief market analyst at Exinity Group.

On the oil market, WTI futures are trading at $70.13 a barrel in May, up 0.7%, while May Brent futures are up 0.89%. up to $75.99/b.

U.S. crude oil inventories rose by 1.12 million barrels, or 0.23 percent, last week. to 481.18 million barrels. Gasoline inventories fell by 6.4 million barrels, or 2.71 percent, over the same period. to 229.6 million barrels. Distillate fuel reserves, including heating oil, fell by 3.31 million barrels, or 2.77 percent. to 116.4 million barrels.

Main photo source: EPA/JUSTIN LANE

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