The Fed or the Federal Bank of U.S. announced their latest updates about the monetary policy and interest rates. In this meeting they outlayered the entire inflation situation in the U.S. and tried to tell the people about the safety of their banking system. However due to multiple failures in recent times people were not getting their assurance. The Fed announced another rate hike after telling about the strength of their banking system and this time as well it was done with 25 bps.
The target rate for the federal fund rate has now been revised to 5 – 5.25%. Although necessary changes will be made based on the situation. For the future time period the Fed will take in the market data and then decide whether to hike the rates down the line or not. Hence the Fed has not signalled any stops in the increase in the interest rates. However many investment banks think of this being the end of the entire interest rate hike cycle.
Effects of the Fed rate Hike
Stocks and Treasury Bills
The yields on the treasury bills dropped immediately by a sharp percentage after the Fed rate hike announcement. The benchmark yields were down 3.6 bps from 3.439%. Also the 30 year bond yield was down by 1.9 bps to 3.7128%.
The banking stocks of multiple regional banks fell due to the rate hike scenario. The shares of Zion Bancorp decreased by 4.6%, shares of Western Alliance decreased by 3.1% and that of Pacwest decreased by 7%.
Markets and Currency Situation
The U.S. dollar is incurring losses after the Fed announced the interest rate hike. The dollar was down by 0.42%. The Euro gained against the US Dollar. The Euro was up by 0.46% at 1.1047$. The 13 month high rate of Euro is 1.1099$. Yen also gained against the U.S dollar when the dollar divided by 1.02% against it at 135.15.
The entire sentiment on Wall Street was bearish due to the rate hike from the Fed. Though Jerome Powell said that the end of the hiking cycle is near he did not specify whether they are going to stop this rise in rates. Rather he said the Fed will review the situation and then decide the further rate hike matter. Hence the Markets reacted negatively to this matter. The Dow dropped by 0.8% and Nasdaq lost 0.5%.
Major Decisions from Fed
The Fed will conduct SORP agreement operations with an operational limit of 500 billion dollars and a minimum bid rate of 5.25%. Similarly it will conduct revenue SORP at 5.05% with a per day min. Limit of 160 billion dollars. The Fed will roll over the Treasury Securities maturing each month above 60 billion dollars at every auction. Also the redemption of Treasury coupons will be done until the principal payments are below the monthly cap.
The Bank consolidation issue has been on fire due to the failure of three banks in the short span of time. Hence Jerome Powell said that the Fed would want to reduce the bank consolidation issue and the organisation also wants to balance the number of small, medium and large banks to maintain the financial ecosystem.
Summary
However the current situation signals that the Fed is not going to increase the rates further down the road. It is more evident that the rate hikes will be there if the situation does not get better or the financial system does not undergo the required changes. The Fed is firm at recovering its banking stability due to the recent failures of banks. The market participants are not sure about the stability coming anytime soon.
Effects on Indian Markets
The Indian markets did undergo a major value loss in one single session due to the Fed rate hike. This was supported by a value loss in the HDFC shares alongside the IndusInd bank shares. However one also has to see that the day after the loss markets recovered 50% of the same and on the next day the entire recovery was almost made. Hence the Indian markets are stable on their own but on the other hand they are also affected by the changes across the globe.
The quarterly result updates are also a major reason for the market volatility in current time. This has been evident by the Nifty50 moving above 176800 levels in no time since the quarterly result announcements started coming. The markets are recovering based on the good financial performance in the previous quarter and also in comparison to the results published for the March 2022 ending quarter. Hence on account of this the participants are witnessing a good recovery in all business segments except technology as it is based on the economy of the U.S and U.K. and Europe at large.
