Negative Interest Rates and Age of Easy Money Haunt Federal Reserve

Barry Adams
22 Mar, 2023
New York City

Major averages rested and looked ahead to review Fed's interest rate decision and views on the economy. 

Most investors are looking for the Federal Reserve to increase the fed funds rate by 25 basis points, despite the ongoing turmoil in the banking sector. 

Inflation in recent months has eased but core inflation, which excludes volatile energy and food prices, has stayed stubbornly high. 

The Fed is battling two opposite trends, higher interest rates are needed to curb 4-decade high inflation and higher rates will increase losses in Treasury securities held by banks of all sizes. 

The Fed has been advertising the need to bring down inflation to its preferred level of 2% from the current rate near 8% and the central bank's credibility is on the line if it pauses before the substantial reduction in inflation. 

 The Federal Reserve is set to announce its rate decision at 2 p.m. ET at the end of 2-day meeting today. 

Despite the multiple rate hikes over the last twelve months, interest rates are still negative and not restrictive enough. 

The current Fed's dilemma is partly the result of its own series of missteps over the last fifteen years, continuing the easy money to goose the economic growth and asset price bubble. 

Russia's war in Ukraine and China lockdowns played critical role in elevating inflation but prices were rising substantially before March 2022

 

Indexes & Yields 

The S&P 500 index increased 3.63 points to 4,005.50 and the Nasdaq Composite index added 8.04 points to 11,866.72. 

The yield on 2-year Treasury notes edged 4 basis points higher to 4.22%, 10-year Treasury notes inched up 3.61% and 30-year Treasury bonds edged up 1 basis point to 3.72%. 

Crude oil decreased 26 cents to $69.50 a barrel and natural gas futures edged down 10 cents to $2.25 a thermal unit. 

 

U.S. Stock Movers 

 PacWest Bancorp decreased 2.4% to $11.93 and the regional bank in focus said it has "solid liquidity and stabilized deposit balances" in its latest update to investors. 

Total available cash is $11.4 billion, which exceeds $9.5 billion in uninsured deposits. The bank said deposit withdrawals were $6.8 billion in the current quarter to March 20. 

The bank also confirmed it borrowed $3.7 billion from the FHLB, $10.5 billion from the Federal Reserve Discount Window, and $2.1 billion in Bank Term Funding Program,

GameStop Corp soared 45.6% to $25.70 after the specialty retailer swung to a profit and posted a surge in gross margin. 

Nike Inc decreased 1.4% to $123.88 after the athletic footwear and apparel maker reported higher revenue and earnings in its latest quarter. 

However, gross margin suffered after the company used markdowns and promotion to liquidate inventories.