- FTSE 100 opens lower, following in the footsteps of Wall Street as nervousness remains about banking sector woes.
- Federal Reserve hikes rates by 0.25% but hints a pause may be on the way.
- US Treasury Secretary Janet Yellen rules out a backstop on all US deposits without congressional approval.
- Bank of England expected to follow the Fed and raise rates by 0.25% later given scorching inflation.
Q4 2022 hedge fund letters, conferences and more
The Fed Raises Rates By 0.25%
With the banking sector not out of the woods and central bank and US treasury officials still on edge, uneasy about what may lie ahead, a sense of nervousness is still hanging over the markets. The FTSE 100 has opened in negative territory, following in Wall Street’s footsteps, with the S&P 500 closing sharply lower, as the Federal Reserve raised rates but signalled a pause was on the horizon given recent turmoil.
Because contagion has been contained, and inflation is still far too high, the Federal Reserve stuck to its plan and lifted rates by 0.25%. Achieving price stability is still the top priority, given the pain high prices have been causing right through the economy.
However, policymakers are highly attuned to the consequences that the banking scare will have on lending, and so the path of further hikes from here now looks much more uncertain, with perhaps only one more rate rise likely. This expectation prompted a fall in the dollar, with the pound gaining ground, rising to $1.23 as monetary policy moves are eyed up in the UK.
Bank Of England Expected To Follow The Fed
Like the Fed, Bank of England policymakers are expected to keep their hands off the pause button for now. There had been hopes that inflation could have retreated from its double-digit heights, but the lurch upwards of consumer prices in February to 10.4% is likely to refocus minds on the need to dampen down demand further and rein in the price spiral.
The spike last month may be short-lived, exacerbated by salad shortages in supermarkets, but the tight labour market is still a cause of concern. As in the US, policymakers will also be assessing the extent to which the banking scare will be a disinflationary force by leading to a knock-on effect on lending which could hit company investments and consumer spending. On balance, the need to stop inflation becoming embedded is likely to be the priority.
Backstop Ruled Out
Backstops on deposits and promises of more help to come in the US if needed, has helped limit deposit outflows from smaller banks, but investors are apprehensive. Janet Yellen, US Treasury Secretary, made it clear in her testimony to Congress that the US government was not considering a “blanket insurance” for bank deposits without legislative approval.
The extent of concerns among lenders about the risks of a rush on withdrawals is evident in the amount borrowed from the Fed funds under its discount window, which surged to record levels last week.
Shares in the beleaguered First Republic Bank (NYSE:FRC) slid by 15% as the market digested the aura of uncertainty emanating from policymakers while ‘too big to fail’ Wells Fargo also fell by more than 3%. Banking shares in London also came under some pressure in early trade with HSBC and Standard Chartered falling on the open.
The oil price is also reflecting the knock-on effect that the banking sector woes could have on the global economy if financial conditions deteriorate, and lenders become more risk averse. Brent Crude is trading around $76 a barrel, hovering around lows not seen since December 2021, with the recent dip the putting pressure on BP and Shell in early trading.”
Article by Susannah Streeter, head of money and markets, Hargreaves Lansdown
