March 22nd, new york, USA. The monitor of the new york Stock Exchange is broadcasting the news that the Federal Reserve is raising interest rates. (Source: vision china)
Between ensuring liquidity and curbing inflation, the Fed finally made a choice. On March 22nd, local time, the Federal Open Market Committee (FOMC) of the Federal Reserve announced that it would raise the target range of the federal funds rate by 25 basis points to between 4.75% and 5%, the highest level since October 2007. After two weeks of banking turmoil, the Fed still chose to continue to raise interest rates. Bloomberg said that the Fed is "gambling".
This is the ninth consecutive rate hike by the Federal Reserve since March last year, and the second consecutive rate hike has slowed down to 25 basis points. The Wall Street Journal said that the Fed’s move is undoubtedly "between inflation and financial instability ‘ Walking a tightrope ’ " . After Silicon Valley Bank and Signatory Bank, the second and third largest bankruptcies in American financial history, it is hard for the outside world to really believe the statement that "the American banking industry as a whole is still stable" conveyed by the US financial regulatory authorities. Many media and experts have predicted that even if the Fed will not give up raising interest rates and shrinking its table, it may choose to suspend interest rate hikes this month when the turmoil in the banking industry has not subsided. However, in the face of the inflation rate still far higher than the target of 2%, all 12 members of FOMC, including Federal Reserve Chairman Powell, voted in favor of raising interest rates. After the Federal Reserve announced the rate hike, Democratic Senator Warren wrote on social media that it was "a mistake" for the Fed not to suspend the rate hike, and that "the current road may make millions of Americans unemployed".
Bloomberg said that the Fed chose to curb inflation instead of ensuring market liquidity, which is "betting that the banking crisis can be controlled", which is a "gamble". The Wall Street Journal warned that the US financial system may be more fragile than the Fed thinks, and raising interest rates may cause further damage to the system. A recent study jointly completed by economists from several universities in the United States also shows that the aggressive interest rate hike by the Federal Reserve has "greatly" increased the fragility of the banking system. Affected by this, at least 186 banks in the United States are facing a situation similar to that of Silicon Valley banks. At that time, even if there is only a small-scale run, more banks will face "thunder". Jay Blethen, chief economist of Wells Fargo, said in an interview with Bloomberg that the Fed "thinks it has the tools to curb the turmoil in the banking system" and "this decision is probably very wrong".
Judging from the market reaction, the Fed’s "moderate interest rate hike" has not received a positive response. After the news of the interest rate hike, the three major stock indexes of new york stock market collectively closed down, among which the Dow Jones Industrial Average fell by 1.63%, the Standard & Poor’s 500 Index fell by 1.65% and the Nasdaq Index fell by 1.6%, which highlighted the market’s unease about the Fed’s decision to raise interest rates. Michael schumacher, head of macro strategy department of Wells Fargo Securities Company, said in an interview with CNBC that policy makers underestimated the speed at which tightening credit conditions would hurt the economy. "The Fed did not really fully believe that tightening credit means that the economy will weaken in a fairly fast way."
The Fed’s decision to continue to raise interest rates and shrink its balance sheet may further transfer the financial risks of the United States to the international market. The Fed’s interest rate hike over the past year has actually accumulated huge risks in the international market. On March 19th, the Swiss government, UBS Group AG and Credit Suisse announced that UBS Group AG would buy Credit Suisse, a bank that recently exploded. This is the first acquisition involving two global systemically important banks since the international financial crisis in 2008, and the last straw that overwhelmed this "century-old shop" was the banking crisis caused by the bankruptcy of Silicon Valley Bank. The British Broadcasting Corporation (BBC) called Credit Suisse’s "thunder" the "Lehman moment" in 2023, pointing out that it was after the Federal Reserve raised interest rates continuously and the cost of capital was getting higher and higher that the weak links in the financial system began to expose problems.
The "pumping" effect caused by the Fed’s continuous interest rate hike has forced the central banks of major economies in the world to raise interest rates in order to maintain the stability of their currencies, which has stirred up the global financial, foreign exchange, bond, import and export markets and impacted the economic stability of countries around the world, and many developing economies have suffered heavy losses. In December 2022, the Ghanaian government announced that it would suspend the payment of Eurobonds, commercial term loans and most bilateral obligations, becoming another economy facing national bankruptcy in theory after Sri Lanka. At the same time, emerging economies including Argentina, Turkey, Egypt, Pakistan, etc. also suffered severe impacts and were deeply mired in the debt crisis. It can be said that it is the domino promoted by the Federal Reserve’s interest rate hike that has been transmitted through the global economic chain, and finally caused heavy losses to developing countries, especially underdeveloped countries.
Obviously, the Fed, which is used to "the United States is sick and taking medicine globally", will not care about what the global "interest rate hike" that it constantly provokes will cause to other countries’ economies, but at the moment when the global economy is highly connected, the United States may not be able to protect itself. As the saying goes, "ten bets and nine losses", the prescription of "raising interest rates" issued by the Federal Reserve may become a "poison" that triggers the rapid slide of the US economy into recession, and ultimately drags down the global economy. (Nie Shuyi)