The Fed’s monetary policy can still upset the markets: because the next financial storm can come from the US rate decision.
The calm returned to the markets thanks to the US debt ceiling deal, but it conceals the next storm: will the Fed shake the stock markets with another earthquake?
The uncertainties that still prevail in the global economy and finance revolve around the moves made by the US central bank on interest rates, with the meeting scheduled for June 14th already eagerly anticipated.
What’s next and why is the Fed cooking up a financial storm?
Will the Fed be a threat to markets? Because there’s a storm coming
Perplexed by the persistent inflation in the face of the fastest rate-hiking cycle since the 1980s, several Fed officials have once again toned down in recent days with a hawkish outlook on interest rates.
By doing so, they could inadvertently set up the stage for the next market crisis. The Fed’s attempt to steer the economy into a so-called "soft landing" while maintaining financial stability is increasing the likelihood that it will instead land on a crash landing or a longer, more turbulent glide path on the ground.
“I think if I were to make a mistake, I would be making the mistake of being a little too aggressive in terms of bringing down inflation”, the president of the Federal Reserve Bank of Minneapolis told Reuters last week.
The doubt is almost Hamlet-like and risks leading the US into crisis after crisis. “The market is confused as to whether the Fed is tightening or easing”, said James Tabachi, chief executive officer of broker-dealer South Street Securities. “And right now, the market doesn’t know which Fed to follow”.
The rapid rise in interest rates over the past year has exposed risky bets and harmful business models, after more than a decade of ultra-cheap money.
Since the burst of the crypto bubble a year ago to the turmoil in the US regional banking sector in March, tensions have increased in various parts of the global financial system.
While it’s unclear where the next storm will hit markets, the potential sources of vulnerability are many, from commercial real estate to money market funds. Markets have rallied since the peak of the banking crisis happened. There are signs that the economy remains resilient. More investors are betting that the Fed can lower inflation without causing too much economic pain or instability.
However, even tighter monetary policy can still trigger shocks, forcing more Fed intervention and offsetting some of the tougher policies.
“The Fed has no desire to conduct monetary policy through financial crises”, said Wendy Adelberg, director of the Hamilton Project at the Brookings Institution.
However, this could happen. Systemic shocks can manifest themselves in known and unexpected ways. In its most recent financial stability report earlier this month, the Fed listed several areas of concern. These included life insurance and some types of bonds and debt funds.
The Minneapolis Fed’s Kashkari also indicated to private markets that while many experts expect risks to be limited, the lack of transparency means officials don’t fully understand the scale of debt bets, for example. Just as it is not always clear how financial institutions are interconnected.
There’s a lot of complexity out there that we don’t see into, Kashkari said. Essentially, with a still aggressive monetary policy from the Fed, or in any case unclear on the path to follow, the US central bank itself can unleash collateral financial shocks.
Original article published on Money.it Italy 2023-05-29 15:43:42. Original title: Così la Fed sta per scatenare una tempesta sui mercati
