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The United States Federal Reserve raised its main interest rate by a quarter of a percentage point this Wednesday, for the tenth consecutive time since March 2022, with the aim of curbing inflation at all costs. The rise in the cost of credit in the face of economic activity is expected to help ease pressure on prices, despite repeated signs of concern from the banking sector. In this sense, the FED hinted that it could mark a pause.
The decision, unanimously adopted this Wednesday after the two-day meeting of its monetary policy committee to set its main interest rate between 5 and 5.25%, the highest since 2006, is part of a declared war against inflation that began more than a year ago.
The decision is far from a surprise. What some analysts highlight is that the speech by Jerome Powell, president of the Fed, hints at a change of course, in other words a possible pause in this rate hike process.
Víctor Alvargonzáles, an expert in NEXTEP independent financial advisory service, explained to R.F.I. Why is this announcement so important?
“It is very important, because all the problems and ills, —to put it in some way—, of the stock markets, the financial markets for more than a year, have their origin in the increase in interest rates. The increase in interest rates interest rates began at the beginning of last year and that generated a stock market crash that has lasted all of last year or almost all of last year. Bonds also fell a lot, also as a result of that action. So, The fact that the end of that policy is shaping up somehow opens the door to a general change in all financial markets”holds.
For Victor Alvargonzáles, behind the problems in the markets in recent months, particularly in the US banking sector, is the rise in interest rates.
“It’s very simple, one of the problems that US banks have is that money comes out of deposits. Why? Because the State pays much more. If you get 5% in US treasury bills maturing in three months or 4 % at one year maturity, obviously you are looking to get out of a small regional bank that is paying you 1%, the big banks hold up better. Therefore, one of the problems of the banks in the United States is that the money goes to Treasury bonds or monetary funds, because they pay more and provide more security.”
“Another problem is that banks, all banks, have bonds in their reserves. The policy of raising interest rates makes them lose value, because there is an inverse relationship between the price of bonds and interest rates. So, if money is coming out of you, to deal with it you have to sell some losing bonds. You are generating losses on your income statement, which is for example what happened to Silicon Valley Bank. You have a serious problem. That combination , lethal for banks, has as its basic origin the rise in interest rates”.
