The sudden collapse of the Silicon Valley Bank in the United States has led to rumors that the Fed may pause interest rate hikes or even cut interest rates.

However, inflation has not cooled significantly, so the Fed raised interest rates by 1 yard in March, and it is expected to cut interest rates next year.

The picture shows Fed Chairman Jerome Powell explaining at a press conference.

(AFP)

Compiled by Lu Yongshan / special report

Global inflationary pressures have retreated from the recent 10-year high, but they are still much higher than the 2% inflation target set by major central banks. Major economies outside of China are still facing hot job markets and soaring prices.

Originally, the market predicted that major central banks would continue to raise interest rates and expect to cut interest rates next year; however, the sudden collapse of Silicon Valley Bank (SVB) in the United States caused an effect, and the U.S. financial system was already under pressure, causing the Federal Reserve (Fed) to change its policy direction again.

At the beginning of this year, the market reported that the U.S. interest rate is about to peak. The Fed’s cycle of raising interest rates is coming to an end, and may even cut interest rates once or twice by the end of the year; In addition, data such as the unemployment rate and average hourly wages have not cooled significantly, and the job market is still hot.

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Financial system under pressure, Fed rate hike cycle coming to an end

Therefore, Fed Chairman Jerome Powell changed his mind at the congressional hearing on March 8-9, saying that the end-point interest rate may be higher than previously expected. If all the data indicates that the policy needs to be tightened, the pace of interest rate hikes will be accelerated.

The interest rate futures market subsequently bet that the Fed will raise interest rates by 2 yards (0.5 percentage points) after the March meeting, and the terminal interest rate will reach 5.6%. The Fed predicted in December last year that the terminal interest rate was about 5.1%.

Rick Reider, head of global fixed income at BlackRock, also pointed out that because the labor market is still tight and inflation remains high, the Fed has the opportunity to raise interest rates to 6% and maintain this level for a longer period of time.

The current US interest rate ranges from 4.5% to 4.75%. If the market forecast is correct, the Fed still has room to raise interest rates by 4 to 5 yards, and may not cut interest rates until after next year.

However, the sudden collapse of SVB and the spread of the storm to other regional banks have put pressure on the US financial system. There are rumors in the market that the Fed may pause interest rate hikes or even cut interest rates.

However, the core CPI in the United States increased by 0.5% in February, higher than the 0.4% expected by the market, showing that inflation in the United States is still stubborn.

With the financial system under pressure and inflation not cooling down significantly, although the Fed cannot raise interest rates by 2 yards, it cannot surrender to inflation. Therefore, the Fed raised interest rates by 1 yard in March, bringing the interest rates to 4.75% to 5%. After hinting that there will only be one more interest rate hike, this cycle of interest rate hikes is coming to an end, but given the high inflation, no interest rate cuts will be made this year.

The FedWatch tool shows that traders are betting on a more than 50 percent chance that the Fed will raise interest rates by 1 yard after the May meeting, but expectations for a rate cut have risen, betting that interest rates will fall to around 4.18 percent in December.

Because of the energy crisis that broke out after Russia invaded Ukraine last year, the European Central Bank started this cycle of interest rate hikes in July last year in order not to increase the burden on the people. The current interest rate has reached 3%.

However, the CPI in the Eurozone in February still reached 8.5%, and the core CPI also reached 5.6%, both of which were higher than market expectations, and inflation remained high.

If the European and American central banks end their rate hikes, the stock and bond markets will be bullish for a long time

European Central Bank President Christine Lagarde recently pointed out that inflationary pressures are more "sticky" than expected and that further action is needed to deal with the "monster" of inflation.

However, the impact on financial markets from the collapse of SVB and the financial crisis at Credit Suisse may give the ECB more discretion in its interest rate policy.

Goldman Sachs predicts that the ECB's terminal interest rate will be 3.5% this year.

As for when the ECB will cut interest rates?

Since Lagarde has set the tone, the inflation rate needs to fall back to 2% before interest rate cuts are possible; economists predict that the bank will wait until February next year to start cutting interest rates as the war between Russia and Ukraine has no end in sight.

Prices in the UK began to rise sharply from the end of 2021. The Bank of England raised interest rates by 1 yard in December of that year. It was the first major central bank to start raising interest rates. So far, it has raised interest rates 11 times in a row, bringing the interest rate to 4.25%.

However, the CPI in the UK rose to 10.4% in February, and the market expects to raise interest rates to 4.75% by the end of this year.

Bank of England Governor Bailey said that if inflation remains high, further interest rate hikes are required.

The cycle of interest rate hikes in Europe and the United States is gradually coming to an end. Although the three major economies will still face pressure from inflation and financial system instability in the short term, past experience shows that as long as the central bank stops raising interest rates, the stock and bond markets will be bullish in the long run.

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