Have interest rates peaked? Tricky question for Fed and Bank of England is whether they go ahead with further hikes, says MAGGIE PAGANO
- Both banks had to pull their horns after the latest banking meltdowns
- The mood has hardened after the ECB’s surprise decision to hike rates by 0.5%
- The bet is that they will move more slowly, perhaps raising rates by 0.25%
Central bankers and financial regulators on both sides of the Atlantic are bracing for another tough weekend after last week’s turmoil, which saw the second and third largest bank failures in US history. .
They will keep their phones on red alert and their ears to the ground for whether the dramatic steps taken by the US administration to prevent further contagion after the collapse of Silicon Valley Bank, Silvergate and Signature Bank – and the lifeline given to First Republic Bank – enough to build confidence from new series.
In addition to guaranteeing deposits with the three troubled financial institutions, the Federal Reserve took the unprecedented step of implementing a bank term funding program, aimed at helping banks reorganize their bond portfolios.
This means that the Fed is now offering banks the ability to access billions of cash, allowing them to offer their bond holdings as collateral based on the face value of the assets, instead of the usual market price.
The reason this is so important is that the face value will be higher than the current market value because the bonds they currently hold are based on lower yields, which they fetched when interest rates were low .
Roll the dice: The tricky question facing the Fed and Bank of England is whether they go ahead with interest rate hikes
In addition to these emergency measures, the Fed also expanded its balance sheet by £240 billion this week alone.
It’s another significant and highly political step, prompting economists to wonder whether it marks a pause in quantitative tightening – a policy that had only recently begun. They also worry about the future implications of such a reversal.
Serious questions also arise about who was responsible for this latest turmoil: the bankers who huddled together so greedily to add to what they deemed to be low-risk bond portfolios, or the regulators who encouraged them? Or both.
For now, it is too early to say whether the latest measures will be enough to boost confidence. What the authorities have done, however, is create moral hazard by guaranteeing the banks. It’s a get out of jail card. US Treasury Secretary Janet Yellen assured Congress that the banking system as a whole was safe and that no taxpayer money would be used for bailouts. What they aren’t doing, so far anyway, is what trader Nassim Taleb, who wrote The Black Swan, described after the 2008 crash as “socializing the losses, privatizing the gains.” .
Yet Yellen’s words didn’t work their magic. Shares in the First Republic – which received an emergency injection – fell sharply again yesterday. So did shares of other regional lenders, as well as most European banking stocks, including Credit Suisse, which was also bailed out.
The tricky question facing the Fed and the Bank of England is whether they go ahead with interest rate hikes when they meet next week. It had looked like both banks would pull their horns in the wake of these latest meltdowns, as any rate hikes would only drive bond prices further down and rattle investors.
But the mood has hardened after the European Central Bank’s surprising decision to raise rates on Thursday by 0.5 percentage points. The bet is that both banks will move more slowly, raising rates perhaps 0.25 percentage points, then stop and watch. They should heed President Theodore Roosevelt who said in his 1901 speech, “Speak softly and carry a big stick; you will go far.
nuclear moon
Rolls-Royce went to the moon with its nuclear reactors.
The British space agency has just granted the aerospace giant funding to build a micro-reactor on the Moon, which would provide enough energy for humans when they live there. Yet Rolls-Royce still has a long wait before the government launches its bidding operation for small modular reactors here on earth.
The launch of the SMR tender under the Great British Nuclear scheme was one of the best moves to emerge from the budget, and more details are expected to be announced by the end of the month.
What’s annoying is that Rolls-Royce is by far the strongest contender to win the contract, but it still has to clear the technical milestones alongside other competitors. It sounds crazy, but if the government doesn’t hold a formal procurement process, other competitors could go to court to overturn the decision.
If HMG doesn’t put on its skates, Rolls-Royce could go to the moon before building the much-heralded SMRs.
