After the US central bank uplift its benchmark overnight interest rate by an area of a probability point to the 5.00%-5.25% range, banker Uday Kotak eminent that the hike could lead to risks for regional US banks. He added that systemic banking firmness is crucial, and liquidity moves worldwide to funds and short-term treasuries.
“US fed increases overnight rates to 5-5.25%. Ten years 3.33%. They inverted the yield curve. Money market funds offer 5%+. Risks to regional US banks. PacWest bank drops~ 50% post-market. Liquidity moves worldwide to fund short-term treasuries. Systemic banking solidity is crucial,” Kotak Mahindra’s managing director shared on Twitter.
Earlier this year, Kotak said that he awaits more rate trek from the Federal Reserve as he sees signs of adhesive inflation and that the rate hikes will last longer. “Global central bank balance sheets take vast losses as they purchase long-term bonds and de facto reprint money. Who pays? Kotak specifies “sovereign”.
Understanding the US Fed rate hike
After announcing the new Fed rate hike, Fed Chair Jerome Powell said inflation residue is the chief examine and that it is too soon to say with conviction that the rate-hike cycle is over. Powell said it was now an unlocked question whether further increases would be justified in a wealth still facing high inflation but also manifest signs of a downturn and with risks of a brutal credit clampdown by banks on the skyline.
“We’re closer, or perhaps even there,” Powell said of the end-point of rate growth that has boosted the Fed’s policy rate by a total of five percentage points in the ten meetings since March 2022, an anxious pace for the middle bank and one that may now warrant permit some time for the crash to be felt in full.
US stocks initially held onto obtain after the free of the Fed statement but fell later and closed lower. Yields on US Treasury securities dropped sharply, while the dollar enfeebled against a basket of trading partner currencies.
“Global central bank balance sheets take vast losses as they bought long-term friendship and de facto printed money. Who pays? Sovereign. Signs of sticky inflation in the US and more interest rate hikes are likely. And higher for longer. Remember aeroplane turbulence? Fasten seat belts worldwide,” Kotak said in a tweet.
Policy responses to the rate hike
Kotak’s remark came after several Fed policymakers signalling more rate increases to bring the centre down to the central bank’s 2% target.
This week’s economic data and other reports paint a picture of a still-stubborn boom and an economy that remains relatively powerful in the face of the Fed’s rate hike campaign.
US inflation rose briskly in January, a sign of persistent inflationary pressures that could push the Fed to raise interest rates even higher than expected.
According to a Reuters poll, the US Federal Reserve will lift interest rates at least twice more in the forthcoming months, with the risk that they will go higher still.
Federal hold Bank of Cleveland President Loretta Mester spoke Thursday that from her perspective, the US central bank could become more belligerent with rate rises if inflation surprises to the upside.
Back home in India, the Reserve Bank hiked the vital repo rate by 25 basis points in its current policy. However, it surprised markets by leaving the door open to more security, saying core inflation endures tall.
The central bank said that its plan stance residue focused on withdrawing accommodation. Most analysts had expected the February hike to be the final growth in the RBI’s current tightening cycle, which has seen it elevate rates by 250 base points since May last year.
