The US Federal Reserve raised the interest rate range by 25 basis points, to 4.75-5% per annum, the highest level since the fall of 2007. This decision was made by the Fed's Open Market Committee following a two-day meeting.
The Fed raised its interest rate for the ninth time in a row. Due to such a tightening of monetary policy (DCP), the US regulator is trying to restrain the noticeably accelerated price increase in the country. However, as stated by the head of the department Jerome Powell, the process of combating inflation "will be long."
"If we talk about the economy and monetary policy as a whole, inflation remains too high, the labor market remains very tense. My colleagues and I understand the difficulties that inflation causes, and we remain strongly committed to our goal of reducing it to 2%," TASS quoted Powell as saying.
Inflation in the U.S. began to rise steadily in 2021 amid the effects of the COVID-19 pandemic. Then quarantine restrictions led to interruptions in the supply of a number of products, which eventually caused an increase in consumer prices. At the same time, to support the economy, the Fed printed a significant amount of money that was not sufficiently provided with goods.
The situation worsened in 2022 after Washington imposed sanctions against Moscow. In particular, the ban on the supply of energy raw materials from Russia turned into a shortage of fuel in the United States and, as a result, a sharp rise in the cost of fuel and other goods. Already in the middle of the year, inflation in the United States for the first time in more than 40 years rose to 9.1%, according to data from the US Department of Labor.
In an attempt to curb the record rise in prices, the United States had to use its strategic oil reserves, which have already been emptied by almost half. In turn, the Fed began to sharply raise the rate, although earlier for a long period it kept it near zero.
Traditionally, tightening monetary policy is considered one of the main tools in the fight against rising prices. Due to the increase in interest rates, borrowed money becomes more expensive for citizens and businesses, consumer and business activity weakens, which puts pressure on inflation.
As a result of the Fed's actions, by March 2023, inflation in the States was slowed down to 6%. Nevertheless, the figures are still three times higher than the Fed's target mark of 2%.
In this regard, the leadership of the American regulator considers it appropriate to further increase the interest rate. However, such a move could pose a threat to the financial system in light of recent developments in the country's banking sector, experts say.
"Inflation in the United States remains above the target, and the Fed declares its reluctance to turn away from the path until the final victory over price increases. On the other hand, we see a serious banking crisis, which was also the result of an increase in interest rates, "said Alexander Abramov, head of the Laboratory for Analysis of Institutions and Financial Markets of the Institute for Applied Economic Research of the RANEPA, in an interview with RT.
Recall that in the first half of March in the United States with a difference of several days, three banks went bankrupt at once - Silicon Valley Bank (SVB), Signature Bank and Silvergate Bank - with a total asset of almost $ 331 billion.
After the incident, the President of the United States, Joe Biden, appealed to citizens and assured that the banking sector "remains safe." In turn, the US Treasury and the Fed announced large-scale measures to support the financial system. Nevertheless, news of the collapse of several large companies provoked panic in the country's stock market, and the value of shares of a number of American banks began to decline sharply.
- U.S. President Joe Biden
This was followed by the collapse of stock quotes in Europe. As a result, for example, the second largest bank in Switzerland, Credit Suisse, founded in 1856, was on the verge of bankruptcy and was eventually absorbed by the country's largest financial holding UBS.
"It is the tightening of monetary policy that is the main cause of this banking crisis. The growth of rates made banks' investments unprofitable, and weak reports of financial organizations caused a powerful outflow of capital and led to a liquidity shortage. In these conditions, a further increase in rates can open a bleeding wound and launch a new wave of bankruptcies, "BitRiver financial analyst Vladislav Antonov told RT.
Note that the Fed's policy directly affects the government bond market (treasuries). Investors usually buy these securities from the US Treasury and, in fact, lend their money to the US economy, and in the future receive a stable income in the form of interest. With an increase in the Fed rate, the yield of treasuries usually increases, but at the same time the price of securities decreases.
According to experts, in recent years, American banks have invested a significant amount of funds in US government bonds, including the money of their depositors. Meanwhile, against the background of a sharp increase in the Fed rate and the cheapening of treasuries, the portfolios of credit institutions began to rapidly depreciate. As a result, after the outflow of customer funds began, banks faced a shortage of money.
"It is worth noting that the current situation is different from the events of 2008. Then the crisis happened due to the fact that many banks held toxic assets in their portfolios, which in the end were worth nothing. Now banks have highly reliable government bonds on their hands, but their value in 2022 fell by 25% due to a rapid increase in the Fed rate. This created panic and liquidity problems," said Alexander Abramov.
However, according to Jerome Powell, only a small number of American banks faced such difficulties. As the head of the regulator noted, the financial system may be under threat if the problems of individual financial organizations are not solved, but so far the situation as a whole remains stable.
"Our banking system is solid with stable capital and liquidity. We will continue to closely monitor the conditions in the banking system and are ready, if necessary, to use all our tools to maintain its security, "said Powell.
- Fed Chairman Jerome Powell
- © Sha Hanting
According to Alexander Abramov, the Fed expects that the recent challenges will remain local and will not escalate into a full-scale crisis. However, as Vladislav Antonov believes, as part of supporting banks, the US authorities will again begin to pump their financial system with money, which risks turning into a new wave of inflation growth.
"The Fed was insured by the central banks of Canada, England, Japan, the EU and Switzerland. If necessary, they will provide the Fed with dollar liquidity. At the same time, the US Treasury said that, if necessary, it would provide assistance to bank depositors. That is, the authorities are ready to flood the economy with money to show the whole world what a reliable banking system is in the United States, although it is beginning to burst at the seams, "Antonov said.
Balance of risks
Under the current conditions, the Fed, like regulators of other Western countries, will have to balance between the fight against inflation and risks to financial stability. At the same time, the current state of affairs can have negative consequences for the entire global economy, said March 17, the head of the Central Bank of Russia Elvira Nabiullina.
"On the one hand, we see the vulnerability of the financial sector (in the West. — RT) to interest rate and other risks, on the other hand, the current inflationary pressure remains elevated. Taken together, this situation may increase the risks of a recession in the global economy," Nabiullina did not rule out.
A similar point of view was expressed by the Chairman of the State Duma Vyacheslav Volodin. In his opinion, the mistakes of the US leadership in the economic sphere provoke the emergence of a global financial crisis. Moreover, the problems of the American financial system will most affect those who focus only on it, the parliamentarian is sure.
"The victims of recent bankruptcies have already become ordinary citizens of other countries. We are talking about pension funds in Sweden, Norway, South Korea (invested in shares of collapsed American banks. - RT). No one will return the money to them. The United States will continue to live at the expense of others. Problems will grow and extend beyond the borders of the United States. The only way to protect against the crisis is the de-dollarization of state economies," Volodin wrote in his Telegram channel.
However, the situation in the United States does not have a direct impact on Russia, Elvira Nabiullina is sure. According to her, banks in the Russian Federation on the balance sheets "do not have such accumulated risks" as financial institutions in the States and the EU. In addition, the Russian banking sector is now much less connected with the global financial system, which provides it with additional protection. A similar point of view is shared by Vladislav Antonov.
"The Russian banking system is under tough Western sanctions, so it is no longer so much exposed to external problems. One can even say thank you to Western politicians for hurting themselves more than they do to Russia. There are difficulties, but all issues can be solved. The bulk of settlements with trading partners are already conducted in national currencies," Antonov concluded.