UPDATED 2:24 P.M.
WASHINGTON (Reuters) -The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two U.S. banks.
The move set the U.S. central bank’s benchmark overnight interest rate in the 4.75%-5.00% range, with updated projections showing 10 of 18 Fed policymakers still expect rates to rise another quarter of a percentage point by the end of 2023, the same endpoint seen in the December projections, even amid uncertainty about how much tighter financial conditions will weigh on a strong labor market and the currently resilient pace of inflation.
In a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer says that “ongoing increases” in rates will likely be appropriate. That language had been in every policy statement since the March 16, 2022 decision to start the rate hiking cycle.
Yields on Treasury securities dropped following the release of the statement, led by a fall of more than 10 basis points in the yield on the 2-year Treasury note, which is highly sensitive to Fed rate expectations. U.S. stocks surged, with the benchmark S&P 500 index rising from the unchanged mark to a gain of 0.6%. The dollar weakened against a basket of major trading partner currencies.
“The Fed has been spooked by Silicon Valley Bank and other banking turmoil. They certainly point to that as a potential depressant on inflation, perhaps helping them do their job without having to raise rates as aggressively,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.
The policy-setting Federal Open Market Committee said only that “some additional policy firming may be appropriate,” leaving open the chance that one more quarter-of-a-percentage-point rate increase, perhaps at the Fed’s next meeting, would represent at least an initial stopping point for the rate hikes.
Though the policy statement said the U.S. banking system is “sound and resilient,” it also noted that recent stress in the banking sector is “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”
There were no dissents on the policy decision.
ELEVATED INFLATION
The policy statement made no presumption that the battle with inflation has been won. The new statement dropped language saying that inflation “has eased” and replaced it with the declaration that inflation “remains elevated.”
Job gains are “robust,” according to the Fed.
Officials projected the unemployment rate would end the year at 4.5%, slightly below the 4.6% seen in projections issued in December, while the outlook for economic growth fell slightly to 0.4% from 0.5% in the previous projections. Inflation is now seen ending the year at 3.3%, compared to 3.1% in the last projections.
The outcome of the two-day meeting this week marks an abrupt repositioning of the central bank’s strategy from just two weeks ago, when Fed Chair Jerome Powell testified in Congress that hotter-than-expected inflation would likely force the central bank to raise interest rates higher and possibly faster than expected.
The March 10 collapse of California-based SVB and the subsequent collapse of New York-based Signature Bank highlighted broader concerns about the health of the banking sector, and raised the possibility that further Fed rate increases might tip the economy towards a financial crisis.
Powell is scheduled to hold a news conference at 2:30 p.m. EDT (1830 GMT) to elaborate on the policy decision and the Fed’s views on recent events.
(Reporting by Howard Schneider; Additional reporting by Noel Randewich in New York; Editing by Paul Simao)
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(Reuters) – The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two U.S. banks.
The move set the U.S. central bank’s benchmark overnight interest rate in the 4.75%-5.00% range.
But in a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer says that “ongoing increases” in rates will likely be appropriate.
The three major U.S. stock indexes, which were mostly languid prior to the Fed announcement, moved higher in the immediate aftermath as investors digested the hike and the accompanying statement.
Traders had been split over whether the U.S. central bank would be forced to pause its hiking cycle as authorities in the United States urgently explore ways to bolster financial stability, along with tackling the problems facing First Republic Bank.
Though the Federal Open Market Committee policy statement said the U.S. banking system is “sound and resilient,” it also noted that recent stress in the banking sector is “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”
The Fed’s relentless rate hikes to rein in inflation are among factors blamed for the biggest banking sector meltdown since the 2008 financial crisis.
The latest move to restore calm to restive regional bank stocks came as Pacific Western Bank , one of the regional lenders caught up in the market volatility, said it had raised $1.4 billion from investment firm Atlas SP Partners.
Shares of the bank, which have lost nearly 47% of their value so far this year, were down more than 10% in afternoon trading even as it tried to assuage investor worries by saying it had more than $11.4 billion in cash as of March 20.
But less than two weeks after Silicon Valley Bank sank under the weight of bond-related losses due to surging interest rates, the CEO of hedge fund Man Group, Luke Ellis, said the turmoil was not over and predicted further bank failures.
Policymakers from Washington to Tokyo have stressed the turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.
SVB’s collapse kicked off a tumultuous 10 days for banks which led to the 3 billion Swiss franc ($3.2 billion) weekend takeover of Credit Suisse by rival UBS.
While that deal brought some respite to battered banking stocks, First Republic remains firmly in the spotlight. The U.S. lender is looking at ways to shrink if it cannot raise new capital, three people familiar with the matter said.
First Republic’s shares pared losses to trade down 2.3% on Wednesday afternoon.
Scenarios for the bank were being discussed as major bank CEOs gathered in Washington for a scheduled two-day meeting starting on Tuesday, sources familiar with the matter said.
Although the Fed has said its review of SVB’s supervision will be finished by May 1, banking system ructions were likely to feature prominently in its post-meeting news briefing.
In further fallout, a conservative Republican and a progressive Democrat in the U.S. Senate are introducing legislation to replace the Fed’s internal watchdog with one appointed by the president, aiming to tighten bank supervision following the failures of SVB and Signature Bank.
Republican Rick Scott and Democrat Elizabeth Warren blamed the collapse of the two banks on regulatory failures at the U.S. central bank, which has operated up to now with an internal inspector general who reports to the Fed board.
The Fed was not immediately available for comment.
A NON-EVENT?
Across the Atlantic, European Central Bank top brass said they will watch for signs of stress in bank lending, a day after the ECB warned banks not to be caught off-guard by rising rates.
As investors wonder whether the ECB will be able to continue its own rate hikes to fight inflation, its chief economist Philip Lane said market jitters may turn out to be “a non-event” for monetary policy, while a full-blown crisis that completely rewrites the outlook is unlikely.
For now, the rescue of Credit Suisse appears to have calmed the worst fears of systemic contagion, boosting shares of European banks and U.S. lenders.
Speaking before Lane, ECB President Christine Lagarde said the ECB’s rate hikes could be magnified if banks become more risk-averse and start demanding higher rates when lending – implying the central bank may need to do less.
Nevertheless, an unexpected jump in UK inflation last month led investors to bet heavily that the Bank of England will raise interest rates by at least another 25 bps on Thursday.
WIPEOUT
The wipeout of Credit Suisse’s Additional Tier-1 (AT1) bondholders has sent shock waves through bank debt markets.
But one of the largest investors in the Credit Suisse bonds said he still believes in the value of contingent convertible debt, known as CoCos, and the “bail-in” system meant to save banks seen as too big to fail.
Seeking to boost confidence among investors rattled by its $3 billion Credit Suisse rescue, UBS said on Wednesday it would buy back 2.75 billion euros ($2.96 billion) worth of debt it issued less than week ago.
“They’re trying to be friendly to investors who purchased just before the mess,” said Jerome Legras, head of research at Axiom Alternative Investments.
($1 = 0.9280 Swiss franc)
(Additional reporting by Howard Schneider, Ann Saphir, Sumeet Chaterjee, Tatiana Bautzer, Saeed Azhar, Scott Murdoch, Tom Westbrook, Shubham Batra, Amruta Khandekar, Ankika Biswas, Noel Randewich, Balazs Koranyi, Francesco Canepa, Akriti Sharma, Amanda Cooper, David Morgan, Heather Timmons and Dhara Ranasinghe; Writing by Lincoln Feast, Alexander Smith and Matthew Lewis; Editing by Sam Holmes, Catherine Evans and Nick Zieminski)
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