2023-05-03 04:00:01
The path seems increasingly narrow for the Fed: between a sluggish economy and a swaying banking sector, the US central bank, which is expected to announce another rate hike on Wednesday, is on course to reduce inflation at all costs.
Its president, Jerome Powell, has been repeating for months that bringing US inflation back to its target of 2% will be a long and difficult but necessary effort because long-term inflation would have even more harmful consequences for Europe. economy.
Little chance then of seeing the Fed’s monetary committee (FOMC) consider pausing right now in its forward march.
Widely anticipated, a moderate increase of a quarter of a percentage point, or 25 basis points, is the assumption very widely held among market participants, according to the assessment of CME Group.
If the idea of a pause prevailed at the end of March, the anticipations of a rise of this magnitude have been widely considered since the beginning of April.
However, the situation has changed significantly in recent weeks. While still resisting, the American economy multiplies the signs of slowing down, long awaited and finally visible.
Last week, first-quarter growth came in at 0.3% from the last three months of 2022 and just 1.1% annualized. And the probability of a recession, more marked than initially expected, is widely anticipated by the markets.
“Our data lead us to believe that the monetary tightening and the recent tensions in the banking system will lead to a slight recession, however stronger than what we had anticipated so far”, underlined the chief economist of Oxford Economics. , Ryan Sweet, interviewed by AFP.
Moreover, the fragility of certain banking establishments came back to the fore with the fall of the regional bank First Republic, finally bought over the weekend by JPMorgan Chase, the number one in the sector.
– “Fear is back” –
Concern about the solidity of these medium-sized banks remains strong, with several of them seeing their shares fall on Wall Street on Tuesday, such as PacWest Bancorp (-27.78%) or Western Alliance (-15, 12%).
“The fear was back for the banking industry,” commented Adam Sarhan of 50 Park Investments. “Fear is a very powerful feeling on Wall Street. When it comes in the door, logic goes out the window,” he added.
“The Fed needs to view ‘these banking difficulties’ as a game-changing event,” argued LBBW’s Karl Haeling, and no longer view banks as bearing the brunt of ‘isolated cases of mismanagement’.
Because these banks are suffering in particular from the rise in rates, which set the day-to-day cost of the money that institutions lend to each other. It has gone in just over a year from a range between 0 and 0.25% to values between 4.75 and 5% now.
The Fed will announce its decision in a press release at 2:00 p.m. (6:00 p.m. GMT) then the president of the institution, Jerome Powell, will hold a press conference at 2:30 p.m. (6:30 p.m. GMT).
The stricter credit conditions for households and businesses, “risk slowing down activity and hiring”, warned on April 20 the president of the regional office of the Fed in Philadelphia, Patrick Harker. They can have the same effect as rate hikes, by slowing down demand and therefore the rise in prices, Jerome Powell also underlined during his last press conference.
After this new expected increase, economists will mainly focus on the language of the press release, to find out “if the reference to + additional firming + is modified”, estimated Art Hogan of B. Riley Wealth Management.
Many in the markets are hoping that the Fed will declare a pause in observation or at least display less strict communication on the monetary level.
However, while inflation fell sharply in March, core inflation (excluding food and energy prices) barely slowed and is now higher than inflation itself.
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