Making Sense

For the week ended 29 March 2023, Federal Reserve released the report on Factors affecting reserve balances. This report has gained particular significance post the collapse of SVB Bank. The report offers insights into the extent of liquidity stress in the system by providing data on facility usage by depository institutions. There is USD 11 bn reduction reduction in loan facility driven by a fall of USD 22 bn through the primary credit discount window and USD 11 bn rise from the Bank Term Funding program, a facility announced in the aftermath of banking crisis to allow institutions to borrow upto a period of 1 year on collateral which will be valued at par.  To just give a sense, on the rates for the facility usage ( as on 31 Mar 2023) Primary Credit 5% Secondary Credit 5.50% Seasonal Credit 4.80%  Bank Term Funding program 4.85% While the borrowing from the discount window / BTFP and other credit extensions is elevated, it has shown signs of stabilization as has other a...

 The Federal Reserve announced the FOMC Rate decision by hiking rates by 25 bps as was expected.  Fed introduced a line regarding the current banking crisis assuring the markets of the resilience of the US banking sector The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Interestingly  , the projected path of monetary policy hasn't changed much  The only significant revision to economic projections is in Year 2024 where GDP growth has been knocked off by 40 bps to 1.20% and the Year 2023 has seen a 20 bps hike...

 While we wait for the Fed Rate decision, let's quickly look at the prior economic projections on Dec 15 2022 . The committee will be announcing the interest rate decision today and also release the Statement of economic projections. Between the Policy on Feb 1, 2023 to now, the financial landscape has materially changed following the collapse of 3 US banks and taker over of a Swiss Bank which complicates the task at hand of managing elevated and sticky inflation on the one side and banking crisis on the other hand. Which way will Fed lean will be clear in 5 mins. This blog is with market consensus and expects a 25 bps hike. Markets are pricing in a 83.40% probability for a 25 bps hike in today's policy. US 2Y and US 10Y yields are trading 4.13% and 3.53% respectively. Euro has continued to appreciate and currently trades at 1.0795 and USDJPY at 132.54. Table 1 Economic projections