The Federal Reserve will announce its latest interest rate decision later today and investors will be hanging on their every word in light of recent banking sector instability.
Today was always likely to mark the end of the US central bank’s tightening cycle – not that it has explicitly signaled this – but we’ve now reached a stage in which every rate hike could have unwanted and unintended consequences.
Turbulence in the banking system in March is evidence of that and the rescue of First Republic Bank by JP Morgan in recent days, and the sell-off that followed in other regional banks, suggests significant stress remains.
Which begs the question, why would the Fed opt to tighten at all today when it can see that the financial system is under strain, credit conditions have tightened as a result and the lag with which monetary policy operates means they don’t yet fully understand what the full impact of their recent rate hikes has been.
With that in mind, it would be perfectly reasonable to pause today especially when we’re already starting to see signs of the labour market softening and inflation easing. And you can see that investors are of the view that a rate hike today is a mistake as they see a high likelihood of it being reversed over the next couple of meetings. Hardly a vote of confidence.
And yet, it still looks extremely likely which makes the Fed’s communication alongside it all the more important. It must now pivot away from promising further rate hikes towards a more neutral stance or we could see further turbulence in financial markets, particularly in those regional banks that still look vulnerable.
Bank woes send Oil prices tumbling once more
Oil prices have been crushed again over the last 24 hours as US regional bank shares sold off heavily and fuelled fears of a more significant economic downturn this year. The warning signs are there that investors are extremely anxious about the global economic prospects, particularly the US, and the data is slowly catching up which should deter the Fed from hiking today but it in all likelihood won’t.
The US may be heading for recession and they may not be alone which doesn’t bode well for crude demand. Oil prices are heading back to the March lows which will no doubt frustrate OPEC+ so soon after cutting output. Will the group be tempted to hold an emergency meeting or wait to see how the situation develops? They’ve denied being price driven in the past but it’s clear that’s not entirely true. Another surprise intervention could act as a further deterrent to sell-offs in the future on the belief the cartel will simply jump in again.
New record highs incoming for Gold?
Gold jumped back above $2,000 on Tuesday as investors fretted about the prospect of further disruption in US regional banks, pushing US yields lower and weighing on the dollar. In other words, investors are expecting a swift u-turn from the central bank in light of what we’ve seen in the US banking sector in recent months and yesterday’s moves have further solidified that view.
A dovish Fed today, either in the form of a surprise pause or a hint at rate cuts this year, maybe even a neutral shift, could further support gold and maybe even trigger a run at record highs which are now not that far away. The interesting thing will be how markets would respond if the Fed sticks to its hiking script of recent months because aside from exacerbating the pain on the economy, it would also surely necessitate an even more aggressive shift a little later on.
