Fed officials trigger recession fears in the recent meeting
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US Treasury yields declined alongside global stocks after the recent policy meeting by the Federal Reserve rattled the market. The meeting alluded that the recent crisis in the banking industry could spill over to the broader economy and trigger a recession.
Fed projects a mild recession this year
The Federal Reserve is assessing the effects of the stress in the banking industry and the potential for a “mild recession” towards the end of the year. The minutes hinted that policymakers wanted higher interest rates as there were signs that inflation was still high.
Analysts believe that while the turmoil in the US banking industry has cooled down, there is a likelihood that it could pick up again in the coming weeks. Banks could also be under intense pressure as the earnings season will start on Friday, and top US lenders will be posting their Q1 financial results.
Stocks across Europe and the US had shown signs of a rally after March’s cooler-than-expected US inflation data. The data raised hopes that the Fed could ease its aggressive monetary tightening policy. The Fed recently hiked interest rates again by 25 basis points.
US consumer prices barely increased, with the cost of gasoline plunging by 4.6%. Additionally, the high rent prices kept inflation high, and there are chances that the Fed will hike rates again after the Fed policymakers hold a meeting on May 2-3.
US inflation is still notably higher than the Federal Reserve’s 2% target, which has created concerns across the market over whether the Fed might pause interest rate hikes. The markets are eagerly waiting to see whether the Fed will go in a different direction and ease the rapidly increasing cost of borrowing.
However, most analysts do not expect the Fed to ease interest rate hikes, with most expecting the hikes to continue during the year. Money markets are already preparing for another hike, with the probability of another move increasing above 70%.
Inflation remains high
The core CPI index, which does not include food and energy, increased by 5.6% after a 5.5% increase in February. The hike showed that the markets were leaning towards further hikes. While inflation levels might be dropping, it is yet to reach the Fed’s 2% goal.
The US dollar also dropped against the Canadian dollar after the Bank of Canada set the overnight interest rate on hold at 4.50% per expectations. The bank also increased its growth forecast for 2023 and eased on warnings about a potential recession.
In Europe, policymakers are also deliberating on more interest rate hikes. However, the policymakers have shared contrasting views on how much the rate should be hiked, indicating that the bank’s next decision has yet to be determined.
The MSCI global index closed trading with a 0.08% drop. The Dow Jones Industrial Average also lost 0.11%, while the S&P 500 plunged by 0.41%. The Nasdaq Composite Index also dropped by 0.85%.
