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Thursday, December 7, 2023

Fed, new rate hike of 0.25%: never this high since 2007, they reach 5%

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The risk of leaving rates unchanged was probably greater than the risk of raising them, so in one of the most precarious political gatherings in recent years, forced to deal with the impact of the banking crisis and inflation well above the 2 target % remains to be balanced over the medium term, the Fed announced a 25 basis point hike, bringing the US benchmark interest rate to a range of 4.75-5%, the highest since 2007. Before the banking crisis, analysts were betting on a hike by 50 basis points, as Federal Reserve President Jerome Powell hinted two weeks ago in his testimony before the US Congress.

The change of “guidance”

“The US banking system is sound and resilient,” says Powell, explaining that recent developments in the banking system are likely to lead to a credit crunch for businesses and households and weigh on economic activity, the labor market and inflation. But it is “too early” to determine its effects because there is “too much uncertainty”. If the tightness isn’t over, the news is that the Fed is changing its own policies accompaniment: no longer anticipates continuous increases, but assesses whether the increases are appropriate in light of the new scenario. Powell simplifies: “No more continuous increases, but perhaps further increases”. In other words, the Fed is ready to “adjust” its monetary policy if new risks emerge from the banking crisis, which saw three U.S. banks fail in a week. But a rate cut is not expected,

The banking crisis

The demise of Silicon Valley Bank (SVB), the second largest U.S. bank failure since 2008, sparked a run on U.S. regional banks. Broadcast abroad was the flash rescue of Crediti Suisse, which was bought by Ubs for 3 billion Swiss francs on Sunday, March 19.

About the SVB Powell claims his management has “seriously failed”, but assured that “these are not weaknesses that extend to the entire banking system” because the SVB was a very special case, with customers concentrated in a single sector, which of technological startups, who all knew each other. And that made it easier couch is running with $42 billion in deposits being withdrawn in one day, marking the end of the Svb. After the bankruptcy, however, “it is clear that we need to strengthen supervision and regulation” of US banks, the Fed president admitted, recalling that a review is underway to understand “what went wrong “. This is his only interest, he stressed.

Revised estimates of GDP and inflation

The US central bank also updated its economic forecasts, which are less positive than those of December. US GDP will only grow 0.4% this year (+0.5% the December forecast) and 1.2% in 2024 (+1.6%), while the projection for 2025 remains unchanged +1.8%. Inflation will remain 3.3% higher in 2023 than the 3.1% estimated in December, before falling to 2.5% in 2024 and finally to 2.1% in 2025. components, the estimates have been revised upwards both this year to 3.6% from the previous 3.5% and to 2.6% in 2024 from the 2.5% forecast in December.

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Source: Corriere

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