May 04, 2023: Fed Continues the Battle Against Inflation

The Federal Reserve.

Federal Reserve Chairman Jerome Powell said the United States will likely avoid a recession. However, there is also a chance of not avoiding it, and he added: “We may have hope that the recession will be mild.”

The change in the Federal Reserve’s statement revealed a clear intention to stop further interest rate hikes. The Federal Reserve deleted from its statement the phrase “some additional hikes may be appropriate” to achieve the inflation target of 2%.

The statement’s language was modified to suit no new interest rate hikes. The statement did not indicate future increases or the target range for interest rates.

The statement confirmed that the Federal Reserve “will take into account the cumulative tightening of monetary policy, the slowdown that monetary policy has on economic activity and inflation, and economic and financial developments.”

While a tight policy can remain, the path forward must be more transparent concerning rising interest rates as policymakers evaluate incoming data and financial conditions.

Powell denied that Federal Reserve members intend to lower interest rates in 2023, saying that he sees maintaining high levels as helping to bring down inflation and confirming that this will not be the decision if events continue normally without any deviation.

Federal signals push gold toward record levels.

Gold prices rose to near record highs on Thursday, as US Treasury yields and the dollar fell after the Federal Reserve hinted that it might temporarily halt its interest rate hike cycle.

The US Federal Reserve raised interest rates by 25 basis points, per market expectations. The central bank did not say it “expects” that there will be a need for further interest rate hikes but only said it will monitor upcoming data to determine whether more interest rate hikes “may be appropriate.”

Gold continued its gains in trading yesterday, Wednesday, following the drop in the dollar and the release of the US Federal Reserve decision.

However, the increase widened after the market closed following a report of a potential collapse of PacWest Bank, where Bloomberg reported that the bank is assessing the possibility of an acquisition due to the bank’s financial health declining by more than 80% this year.

Gold futures rose by 0.7% or $13.7 to reach $2,037 an ounce.

Meanwhile, spot contracts rose by 1.13% to $2,039 an ounce.

A new banking collapse looms on the horizon, with sharp declines in the stocks of many banks.

Despite assurances from the Federal Reserve Chairman yesterday that the banking crisis is over, shares of PacWest Bancorp (NASDAQ: PACW) fell in after-hours trading yesterday, coinciding with continued concern about the US banking system.

At the same time, shares of Western Alliance Bancorp (NYSE: WAL), based in Phoenix, fell 4.4% yesterday and are currently down 21% in pre-market trading.

The Dow Jones Industrial Average ended yesterday’s trading down 0.80%, or 270 points. Stocks rebounded in the first few minutes of the press conference that followed the announcement of the bank’s interest rate hike decision when Powell hinted at the possibility of stopping the rate hikes at the current level. However, they fell sharply when the bank’s chairman ruled out the case of a rate cut in 2023.

During Wednesday’s trading, which investors have been anticipating since March, the last meeting of the world’s largest central bank, the Nasdaq, which is most sensitive to interest rate changes, also fell by nearly half a percentage point, while the S&P 500 index lost two-thirds of a percentage point.

Powell confirmed that the road to achieving the target inflation rate of 2% is still long, but he assured journalists and the millions who watched him live that the US banking system is safe, despite three US banks collapsing in less than two months.

Losses in US bank’s shares.

US mid-sized bank stocks faced substantial declines in the past few hours amid investors’ flight from these stocks and fears of new collapses in the US banking sector.

Shares of many small and medium-sized banks in America sharply fell at the close of Wall Street following the collapse of First Republic Bank and JP Morgan’s acquisition of all its assets, signaling that investors remain concerned about the health of the US banking industry amid high-interest rates on the dollar.

US banks were hit hard in the aftermath of the collapse of Silicon Valley Bank in March of last year, prompting US banking authorities to ensure investor deposits and restore confidence in small and medium-sized banks primarily concentrated in US states.

Shares of Western Alliance, based in Phoenix, fell 4.4% yesterday and are now down 21% in pre-market trading. Metropolitan Bank in New York fell 0.1% yesterday and 17% in after-hours trading. US Bancorp shares fell 2.7% yesterday and 1.6% in pre-market trading.

In addition to the decline in central bank stocks, JP Morgan’s shares fell 2.0% yesterday, Bank of America’s shares fell 1.0%, and Wells Fargo’s shares fell 0.5%.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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