Saturday, December 2, 2023

The Fed warns that a sharp rise in rates can increase financial volatility

The Federal Reserve (Fed) of the United States warned this Monday that a “sharp” rise in interest rates to control inflation could cause a greater volatility in global financial markets and liquidity tensions.

In his report on the stability financial system, the regulator indicated that said “pressures on liquidity” they can cause an outflow of deposits from banks, as well as the disappearance of other forms of short-term financing.

A survey conducted between February and early April by staff at the Federal Reserve Bank of NYcollected in this report, indicates that one of the greatest risks to financial stability is high inflation, which could imply a continuation of restrictive monetary policies.

To prepare this survey, the staff contacted 25 professionals, from workers in investment funds to employees of research organizations and consultancies, and university experts from universities, among others.

After the collapse of the US bank Silicon Valley Bank (SVB) on March 10, most respondents did not rule out more banks in trouble as the economy remains robust despite the rapid increase of rates, which could lead to further interest rate hikes in the future.

In this sense, many participants in the study cited the sector of the living place as a possible instigator of a “systemic risk” for financial stability precisely because of the high interest rates. Specifically, some of the people contacted believed that a bank’s exposure to commercial property assets of low performance could lead to instability.

They also cited a number of risks geopolitical factors such as tensions between the US and China, which could deteriorate trade and financial flows, having negative repercussions on supply chains and the investment environment.

Other dangers would be a potential conflict between china and taiwanwith a hypothetical US intervention, and an escalation in the war in Ukraine, which could lead to an increase in the price of raw materials.

The Fed decided last week to raise rates again. interest ratesthis time a quarter of a point, and for the moment it is not considering pausing the increases, despite the banking turmoil in the country in previous weeks.

In his report, the central bank American explains that “the substantial withdrawal of uninsured deposits” contributed to failures at banks SVB, Signature, and First Republic, leading to further funding stress for other banks, especially those heavily dependent on deposits uninsured and are more exposed to risk due to high interest rates.

The Fed indicated that its intervention and that of other government agencies have helped “to mitigate” these tensions and to limit others in the future.

“Domestic banks have a wide liquidity and a limited reliance on short-term, large-scale financing,” says the regulator, adding that “structural vulnerabilities” remain in short-term financing markets.


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