Pre-Market Stocks: Bank crash puts Fed in stalemate

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With only a few days left until the next Fed interest rate decision, US policy makers are between a rock and a hard place.

Recent collapse of the banking sectorinstigated in part by a Silicon Valley bank crumbling under the weight of higher interest rates, prompted some economists and analysts to call for moratorium on rate hikes until the industry figured it out.

At the same time, inflation remains well above the central bank’s 2% target, economic data show. labor market strength And consumer spending sustainabilityand the Fed officials signaled their intention to aggressively tighten monetary policy until price shocks subside.

“Increased inflation background means that [the Fed] is in a very delicate situation compared to the past 40 years,” Gregory Dako, chief economist at EY, wrote in a note on Thursday. In previous years, the Fed has been able to “relentlessly” respond to financial risks by easing policy without worrying about price stability, he said. But today the conditions are “very different, inflation is still too high.”

So what should politicians do at the March 21-22 meeting?

Reputation game: The question is not what the Fed should do, but what the Fed will do, Dacko said. “Mrs. heritage could be the determining factor,” he added. “[Federal Reserve Chair Jerome Powell] and most politicians don’t want their legacy to be a failure to bring inflation down to the 2% target.”

It was a look The European Central Bank adopted Thursday, when President Christine Lagarde announced an aggressive half-point rate hike just hours after Credit Suisse accepted a $53.7 billion loan to help stay afloat.

Lagarde chose to portray this rate hike as a signal that the financial system remains strong. The central bank has the tools, if needed, to respond to a liquidity crunch, “but that’s not what we’re seeing,” she told reporters on Thursday.

Lagarde stressed that European banks are much more resilient than they were before the global financial crisis, with strong capital and liquidity positions and no concentration of Credit Suisse risk exposure.

Most large banks have some level of financial connections or relationships with other banks, either because they have lent money to these banks, invested in them, or have other financial arrangements. But in the case of Credit Suisse, which was slow moving car accident for many years, many large institutions have already distanced themselves.

The ECB’s stance opens the door for larger increases from the Fed next week.

“Consequences [of the ECB hike on] Fed meeting next week suggests the Fed will raise rates [a quarter point] based on the probability of the future, but will signal that the stability of the banking system remains strong,” said Quincy Crosby, chief global strategist at LPL Financial.

Dual Approach: The Fed is likely to borrow another tactic from the ECB: to carefully distinguish its campaign against inflation from its work to contain financial system problems.

By taking this dual approach, “the Fed will be able to continue to gradually tighten monetary policy while keeping a close eye on developments in the financial markets,” Dacko said.

Under that plan, Powell used his Wednesday press conference to highlight the separation of monetary policy and the Fed’s work to reduce the risk of cascading failures in the financial world.

Predictions: According to the CME FedWatch tool, the majority of investors are betting that the Fed will raise rates by a quarter of a point next week, although a large minority are counting on a pause in the increase. Prior to the current stress in the banking sector, Fed officials hinted that they would raise rates by half a point. Investors now think there is a 0% chance that this will happen.

But according to some economists, Wall Street could be in for a surprise on Wednesday.

“Markets lowered their expectations about the interest rate path, anticipating that central banks would come to the rescue of the economy by cutting rates, as they did during periods of financial stress,” BlackRock analysts wrote on Thursday. “We believe this is misguided and expect major central banks to continue raising rates in their meetings over the coming days to try to rein in sustained inflation.”

Just like ever: During the shaking According to Sima Shah, chief global strategist at Principal Asset Management, the situation Powell is now facing is not unprecedented.

“Every cycle of central bank tightening in history has caused some sort of financial hardship,” she wrote on Thursday. “Until this week, markets have generally ignored the threats that the tightening policy has begun to uncover. However, the latest turmoil has quickly reminded investors that risky assets simply cannot escape the wrath of monetary tightening.”

Eleven largest US banks extended a $30 billion lifeline for First Republic Bank to save the regional lender from the fate of its industry peers, Silicon Valley Bank and Signature Bank.

First Republic shares tumbled after SVB’s crash last week, and reports began to circulate that the bank was considering a sale. On Thursday, a group of financial titans announced they would put enough money into the bank to meet withdrawal demand and hopefully restore some confidence in the safety of the US banking system.

“This show of support from a group of large banks is welcome and demonstrates the resilience of the banking system,” the Treasury Department said in a statement Thursday.

The largest banks include JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Truist.

In a statementThe banks said their actions “reflect their trust in the First Republic and banks of all sizes”, adding that “regional, medium and small banks are critical to the health and functioning of our financial system.”

Speaking of lifelines, the beleaguered mega-bank Credit Suisse may need more help to stay afloat. reports Mark Thompson from CNN.

Banking analysts at JP Morgan said the $53.7 billion support offered by the Swiss central bank would not be enough given “permanent market confidence issues” with Credit Suisse’s plan to spin off its investment bank and the erosion of broader business.

Clients withdrew 123 billion Swiss francs ($133 billion) from Credit Suisse in 2022 – mostly in the fourth quarter – and the bank reported an annual net loss of almost 7.3 billion Swiss francs ($7.9 billion) in February. which is the biggest annual loss since the global financial crisis. in 2008.

“In our view, the status quo is no longer an option as counterparty fears begin to emerge, reflecting on weak credit/equity markets,” JP Morgan analysts wrote in a research note on Thursday, adding that the takeover is likely by the larger Swiss competitor UBS (UBS) – was the most probable endgame.