Tag: FED

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U.S. holds interest rates at 5.25% – 5.5%, but expect higher rates for longer

Central banker

Fed holds steady

The Federal Reserve held interest rates steady in a decision released Wednesday 20th September 2023, while also indicating it still expects one more hike before the end of the year and fewer cuts than previously indicated next year.

That final increase, if realised, would be it for now according to data released at the end of the Fed two-day meeting. If the Fed goes ahead with the move, it would be the twelfth rate hike since policy tightening began in March 2022.

No change priced in

Markets had fully priced in no move at this meeting, which kept the fed funds rate targeted in a range between 5.25%-5.5%, the highest in some 22 years. The rate fixes what banks charge each other for overnight lending but also affects many other forms of consumer debt too.

While the no-hike was expected, there was plenty of uncertainty over where the rate-setting Federal Open Market Committee (FOMC), would go from here.

Judging from reports released Wednesday 20th September 2023, the bias appears towards more restrictive policy and a higher-for-longer approach to interest rates.

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Why buy U.S. stocks when yields are high?

Cash

At 4.33%, the 10-year Treasury yield in the U.S. is at its highest in 16 years. That represents a risk-free, long-duration asset with relatively high returns and this is challenging the stock market.

Why should traders invest in stocks that may not return as much, or just slightly more and take unecessary risks, when there is an asset class that guarantees around 4% return or slighlty more?

Cash is king?

Cash is now yielding 5% in the U.S., short term bonds are yielding 5% plus, so equities for the first time in a long time, have actually got some competition.

Typically stocks if they do well, are likely to return more than a risk-free asset, precisely because it isn’t certain stocks will rise. That’s called the equity risk premium, a return that’s supposed to compensate stock investors for the chance that they might lose money. But, as  the premium is below 1% now. Historically, it’s been between 2% and 4% – meaning stocks are looking much less attractive than Treasuries.

Harder job for the Fed?

Another potential issue that could crop up with high Treasury yields is that it could make the Federal Reserve’s job tougher. During the recent Jackson Hole gathering, the Fed head has indicated that more interest rate hikes are still high possibility.

But don’t panic just yet… this is likely a pullback phase of a bull market analysts suggest. That is, it’s still too early to be bearish on stocks.

Yardeni Research president Ed Yardeni is reported to have said that the market is ‘going to hang in there’ and ‘a year-end rally will bring the S&P 500 back to something like 4,600‘.

That implied an increase of almost 5% in stocks – while not certain – would give Treasuries a run for their money again.

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FedNow: A New Instant Payment System for US Banks

Digital Dollar

New FED Payment System

The FEDNOW payment system is a new instant payment infrastructure developed by the Federal Reserve that allows financial institutions of every size across the U.S. to provide safe and efficient instant payment services. 

Live system

It went live on July 20, 2023 and enables individuals and businesses to send and receive money in near real-time, 24/7/365, through their depository institution accounts. 

The service is a flexible, neutral platform that supports a broad variety of instant payments and offers optional features such as fraud prevention tools, request for payment capability, and tools to support payment inquiries. 

FedNow is the first new payment rail in the United States since the introduction of the Automated Clearing House (ACH) in the early 1970s.

Digital Dollar?

Is this a possibly a pre-emptive strike to get ahead of international digital currency deployment and set the scene to adopt a digital payment structure of a new ‘crypto coin system’ for the future – the digital dollar?