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The US Federal Reserve’s decision to increase its cash rate for the ninth consecutive time has sparked questions over the long-lasting effect of the ongoing banking crisis taking place across the US.
On Wednesday, America’s central bank once again hiked rates, this time by 25 basis points (bps), signalling that the fallout from the banking collapses would be realised in the months ahead.
US Federal Reserve Chairman Jerome Powell said it was “too soon” to fully understand the effect of the collapses and thus “too soon to tell how monetary policy should respond”.
“As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation,” Mr Powell said.
“Instead, we now anticipate that some additional policy firming may be appropriate.”
Mr Powell confirmed the central bank would continue assessing the effects of higher rates on economic activity, the labour market and also inflation.
As many critics acted swiftly to blame the banking turmoil on the rising interest rates, the latest Fed meeting brought with it a change in dialect.
During the last meeting, it affirmed that inflation was still at the forefront of its decision, with “ongoing increases in the target range” still potentially necessary to stem rising costs of living. On Wednesday, the Fed pointed towards additional policy firming.
In light of the news, US bank stocks took a hit on Wednesday after many viewed government officials to be sending mixed messages.
“You’ve seen that we have the tools to protect depositors when there’s a threat of serious harm to the economy,” Mr Powell said.
“Depositors should assume that their deposits are safe.”
Yet, despite Mr Powell ensuring the public that their deposits are safe, Treasury Secretary Janet Yellen didn’t have much to say in regard to extra measures in place following the crisis.
In regards to reports of an expansion of the Federal Deposit Insurance Corporation for deposits of more than $250,000, Ms Yellen said she was unsure if the failure of a bank was deemed to create a systemic risk.
“This is not something we have looked at, it’s not something we’re considering.”
As bank stocks slide and investors are increasingly confused, experts are of the belief that the collapse of SVB, Credit Suisse and Silvergate are signals that rates are starting to bite.
Stake markets analyst Megan Stals believes it could show benefits for gold investors.
“The injection of significant amounts of US dollar liquidity into the system by several major central banks suggests that concerns about a credit crunch were not unfounded — so gold is likely to see continued inflows as investors seek safe-haven assets,” she said.
“This move has also been boosted by Treasury Secretary Janet Yellen’s comments that there are no plans to guarantee all bank deposits.”
Despite that, Ms Stals suggested treasury yields decreasing following the Fed’s announcement could mean a move back into equities is on the horizon.
With indications pointing towards the US nearing the end of its rates cycle, Ms Stals said she believed this could “bode well” for technology stocks across the US, which have been hit hard by the rate hikes in the past 12 months.
What does this mean for the next RBA decision?
In Australia, as the Reserve Bank of Australia, which is preparing to decide whether or not to raise its rates again next month, recently indicated that it would do “whatever is necessary” to bring inflation back in line.
At the RBA’s decision in early March, the board boosted rates for the tenth time in a row, by 25 bps, to 3.6 per cent.
While a possible pause on rates was in the air for April’s meeting, the latest rates rise in the US potentially quashes those plans. The newly-announced rates in the US were between a range of 4.75 per cent to 5 per cent. For comparison, Australia’s rates sit at 3.6 per cent.
But, how do US interest rates affect Aussies?
Granted that the Fed Reserve is the world’s key reserve currency, any changes to its interest rates mean changes in other countries are likely in a bid to offer competitive pricing.
Unfortunately for Aussies, the much-hoped-for rates pause from the RBA in April could once again be put back on the drawing board, as a rates push could be the only way to keep rising US rates at bay.
Investors should buckle in; higher interest rates for Aussies, losses in investments, and higher mortgage rates could lie ahead.
