In the past two weeks, there has been a lot of drama surrounding the rate hike. Initially, the market generally expected a 25-basis-point increase. Then, with high inflation expectations, the expected increase was raised to 50 basis points. After that, with bank failures looming, expectations plummeted to even a possible 25-basis-point decrease. Then, the banks were able to control the situation, and expectations returned to a 25-basis-point increase. In the end, the Fed "met" expectations and raised the rate by 25 basis points, but also issued some harsh words to control inflation.
The Federal Reserve has raised interest rates by 25 basis points as scheduled, and warned that bank failures could drag down the economy. On the 22nd local time, the Federal Reserve Board of Governors concluded its two-day monetary policy meeting and announced an increase in the federal funds rate target range by 25 basis points to between 4.75% and 5%. Prior to this, there were significant differences in market expectations as to whether the rate hike would be 25 basis points or be paused. The Fed's interest rate decision this time may be mainly due to two considerations:
- The Fed's focus is still on reducing inflation, as the Consumer Price Index in the US in February increased by 6% year-on-year, far from the target level of 2%.
- Pausing the rate hike could exacerbate investors' concerns about the ongoing spread of the banking crisis.
The banking crisis highlights the risk of the Fed's aggressive rate hikes. In March, several US banks closed down, and negative effects continued to spread. Economists generally believe that the Fed's continued rate hikes over the past year are one of the main reasons for serious risks in the US banking system. The rate hike caused US bond yields to soar rapidly, causing the prices of US bond assets purchased by financial institutions in a low-interest-rate environment to drop and highlighting flaws in the financial structures of some banks. At the same time, depositors accelerated withdrawals for reasons such as seeking higher returns and safe havens, causing bank liquidity to deteriorate rapidly and triggering a crisis.
Comment: Yellen's speech was quite sudden and unfriendly to small bank shareholders and bondholders. More small banks may collapse in the future. It is unclear whether Yellen's shift in tone is related to Trump. Trump supporters have said that if Trump is arrested, they will run on banks. If such a movement were to happen with the support of many Trump supporters, the US banking system would be in danger. Overnight, the world discovered that the banking turmoil had not passed. Safe-haven gold has once again provided strong logical support.
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