How Credit Suisse Issued a Nightmare Decision for the Fed and the ECB

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Thursday 16 March 2023

today’s newsletter is by Jared Blickrey, a reporter focused on the markets for Yahoo Finance. follow him on twitter @SPYJared, Read this and more market news on the go yahoo finance app,

Credit Suisse (CS) suffered its worst day on record — a 22% drop in the stock. Bank bonds are also crashing, and investors are paying for insurance on their bonds at rates not seen since the global financial crisis.

As investors question the solvency of one of Europe’s largest banks, the safety and soundness of the entire global banking system Big question mark for Wall Street, Meanwhile in the US, investors are still reeling from the failures of Silicon Valley Bank and Signature Bank, sending regional bank shares down for the seventh time in eight sessions.

Federal Reserve Chairman Jay Powell and his central banker allies now face a seemingly impossible dilemma – continue their fight against inflation by raising rates and tightening credit markets even further, or start a new Fight the banking crisis that poses systemic risk.

It’s worth remembering that just last week, Fed Chairman Jay Powell sat before Congress and said the Federal Reserve “is prepared to the pace of rate hikes.” He hedged the statement (as a conservative central banker) citing the need to consider “the totality of incoming data”.

But the bond market took note that day, and so did bank stocks. Suddenly, markets were pricing in a 50 basis points (0.5 ppt) March rate hike instead of 25 bps. The US 13-week Treasury- yield (^IRX) jumped the most in two months – above 4.8% for the first time since 2007. Meanwhile, the S&P 500 Select Financial SPDR ETF (XLF) had its worst day in nearly six months. , has come to a six-week low.

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From there, have been caught in a weeks-long slide that has wiped billions in market capitalization value.

Whether or not Powell’s trip to the Capitol last week was the proverbial straw that broke the camel’s back, he and his central banker colleagues are facing a monster decision next week with tough choices, and no ideal solution.

Raghuram Rajan, University of Chicago Booth Professor of Finance and former governor of the Reserve Bank of India, joined Yahoo Finance Live to explain the tough choices the Federal Reserve now faces with its twin problems of stubborn inflation and banking instability.

Rajan says the Fed could decide between a 25 basis point hike and a permanent pat, leaving rates where they are. (Bond futures telling equal chances for bothas of Wednesday afternoon.)

doubt they will cut,” says Rajan, who also adds that a more aggressive hike of 50 bps is probably off the table. “It’s going to be a very difficult hike at this point when you have so much fragility,” adding, “The question is 25 or zero. [basis points],

If the Fed holds short-term rates steady, Rajan hopes Powell will ease investors’ perceptions that the Fed is on “pause” for several meetings.

Historically, the Fed does not make frequent changes in the direction of interest rate policy, and market participants may get the impression that future hikes are off the table. That could jeopardize the Fed’s inflation-fighting credibility and its stated resolve to start raising rates again if inflation doesn’t ease.

Rajan says if the Fed doesn’t hike, he will defend it with “very strong language,” adding, “We’re not stopping. We’re just taking a break, given how the markets closed, Saying it would leave the window open for the Fed to resume tightening.

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Conversely, if the Fed raises by 25 bps, it indicates that the Fed is still concerned about inflation and the need to slow down the economy. However, this option runs the risk of further freezing credit markets and deepening cracks in the financial system. ( what happened when Powell had a flamboyant game talk last week.)

It may seem counter-intuitive, but the Fed can still theoretically achieve its goal of reducing inflation. No Short term rates moving next week. First, picture a business owner or C-suite executive looking at the current troubles in the banking sector. Many people will see a recession on the horizon and decide to lay off workers, which slows down the economy.

“Financial sector turmoil will be part of the Fed’s job. Now, that’s not the ideal way to get the Fed’s job done. But it can be part of [it]Rajan says. If the Fed thinks the crisis is bad enough that it can do its dirty work, it will cause the Fed to tilt toward zero, he explains.

“It’s all in the air [and] Very confusing,” says Rajan.

Bottom line, this is a big dilemma.

If the Fed doesn’t step in, it risks damaging its hard-won inflation-fighting credibility in the middle of the battle.

If the Fed hikes, it could exacerbate worsening credit market conditions, corroding “productive” sectors of the economy.

At least Powell has another week to digest the developing situation both at home and abroad. Their European counterparts have to work this morning. decisions decisions.

what to watch today


  • building permitsFebruary (1.238 million annual rate versus 1.339 million in January)

  • housing startsFebruary (1.31 million annual rate versus 1.309 million in January)

  • Initial Jobless Claims (205,000 expected vs 211,000 last week)

  • Philly Fed Manufacturing Survey

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