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Credit: Fabian Blank

US Fed raises rates amid turmoil

The US Federal Reserve’s decision to slightly increase key interest rates by 0.25 points to a range of 4.75 per cent to 5 per cent has surprised some analysts. 

The response to the decision has been divided, with some praising the central bank’s optimism in the economy, while others express concern that it may exacerbate ongoing financial issues, especially following the collapse of several banks.

Despite assuring the public that the banking system remained “sound and resilient,” the Fed has acknowledged the potential risks by signalling a possible pause on future rate hikes in response to recent financial sector turbulence. This cautious approach has raised questions among experts about the Fed’s overall strategy and its potential impact on the US economy and global markets.

This month saw the collapse of two US banks, Silicon Valley Bank and Signature Bank, which experts attribute in part to issues stemming from the recent hike in interest rates.  READ THE FULL STORY HERE.

How does the US interest rate affect Australia?

A rate hike by the US Federal Reserve (Fed) could impact Australian businesses in several ways. Firstly, the rise in interest rates could result in the appreciation of the US dollar against other currencies, including the Australian dollar, potentially reducing demand for Australian goods and services in the US market. 

This could also increase competition in the domestic market as imports become cheaper for Australian businesses. Secondly, a higher interest rate in the US could lead to investment flowing away from Australian markets, making it difficult for businesses to raise capital and increasing borrowing costs. 

Finally, a rate hike by the Fed could also result in lower US economic growth, which could decrease demand for Australian exports and negatively impact business sentiment as the US is a major trading partner for Australia.

Last week, the European Central Bank drew attention by revealing a 0.5 percentage point increase in its primary interest rate. In the meantime, the Bank of England is preparing to make its interest rate decision on Thursday in response to higher-than-anticipated inflation figures for February, which came in at 10.4 per cent. 

Megan Stals, markets analyst at the brokerage platform, Stake said: “Today’s 25bps hike is in line with consensus expectations, and many will see it as the most palatable outcome for markets. There was talk of a pause in the lead-up to the meeting, but sentiment about the financial sector has turned more positive in recent days, and investors are reasonably confident that quick actions by regulators have avoided a systemic financial crisis. Inflation is still above target, so a pause would have signalled concerning levels of economic pessimism from the Fed.

“When parts of the economy start to break it has historically marked the beginning of the end for rate increases. The collapse of SVB, Credit Suisse and Silvergate are signals that rates are starting to bite, despite the contradictory economic data. Today’s 25bps hike shows the Fed is still determined to tackle inflation but is becoming more measured in its approach, and this was supported by the more dovish language in today’s press conference.

“Signs that the US is nearing the end of its rate cycle could bode well for the longer-term prospects of US technology stocks, which have been hit hard by rate increases over the past year. But the Fed does not expect to cut rates by the end of the year, and the short-term outlook is still uncertain.

“The injection of significant amounts of U.S. dollar liquidity into the system by several major central banks suggests that concerns about a credit crunch were not unfounded — so gold is likely to see continued inflows as investors seek safe-haven assets.

“This move has also been boosted by Treasury Secretary Janet Yellen’s comments that there are no plans to guarantee all bank deposits. That said, treasury yields have decreased following the Fed’s announcement, which suggests a move back into equities could be on the horizon.”

Despite these economic shifts, the Federal Reserve’s Chairman, Jerome Powell, has reiterated the Fed’s dedication to combating inflation. Powell also described Silicon Valley Bank’s collapse as an exception to the general resilience of the financial system.

“The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time,” a Federal Reserve statement said. 

“In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

“In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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