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Fed Policy Meeting: Powell Warns of Potential Credit Crisis

The Fed’s Chair Message

The Fed’s chair Jerome Powell said that the recent banking problem in the US could trigger a wider problem with credit. In addition, the chair noted that the central bank decision-makers are projecting that the economy could slow down more than expected in 2022.

Banks saw high levels of deposit outflows, and as a result, they were reluctant to lend to businesses. This risk has caused the central bank to reconsider its monetary policy as it waits to see the level of credit contraction and how long it will spread and last.

According to Jerome Powell, the Fed looks into the situation, its seriousness, and whether the problem can be solved. He iterated that it could have caused some macroeconomic effects, and the Fed is factoring this data into its policy decisions.

The policy meeting on Wednesday saw a 25 bp rate hike, with the policymakers deciding in unison. The move saw the benchmark lending rates move from 4.75% to 5.00%. By taking this action, the Fed is moving toward a more dovish stance and away from its hawkish stance.

In addition, the behavior in the banking sector is causing the policymakers to be wary of a recession shortly. However, the Fed is not pausing the rate hikes for good and has put one more rate hike on paper toward the end of 2023.

Powell’s Remarks and Policy Change Could Aid Fight Against Inflation

The policy change and Powell’s remarks about the credit dynamics could help the fight against inflation. However, this would be possible only if the loaning system does not become disorderly due to the Fed’s dovish stance and if more banks do not collapse.

Jerome Powell iterates that the financial ecosystem may be tighter and probably more than the numbers show, but it does not capture the lending conditions. He says that the question remains on the significance of the fiscal tightening.

The chairman did voice his confidence in the US banking system and said that despite the flaws in the bank’s system, the sector has been stabilizing in the last week. He says SVB collapsed because of poor management, not an inherent weakness in the banking sector.

He does note that even though the managerial problems were to blame, there is a chance that central bank supervision was at fault, and there is a study that would be completed by May 1 and shed more direction on the changes required.

Treasury yield dipped after target statements, with the 2-year note dipping more than 21 basis points in the American session. US stocks, which saw a sharp uptick after the statement, could not complete the rally and ended the day lower, with the S&P 500 dipping 1.6% and the DXY weakening against the major currencies.

The outcome of the meeting puts the Fed in a dovish tone, with the markets now fully anticipating a pause in rate hikes. The Fed’s aggressive rate hikes have been the prime characteristic of the market in the last year, with inflation hitting a 40-year high.

The Fed keeps its target benchmark at 2%, but some analysts say that the days of the 2% benchmark are well behind us. The market behavior for the rest of the week will rely heavily on the meeting as investors digest the Fed’s comments.

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