It looks like we’re near to the end of rising interest rates. Markets react. What’s next?
The rising interest rates are the weapon used by regulators to fight high inflation, but it’s important to say that the banking turmoil is still here.
Fed raises rates: What happened during the FOMC meeting (March 22, 2023)
If we had to add another similarity between the current situation and the 2008 global crisis, we could add this one: the current rate reached the upper limit since the 2008 target of the Fed, as reported by the New York Times.
During the press conference of the FOMC (Federal Open Market Committee) meeting occurred on March 21-22, 2023, Jerome Powell made some announcements that had an immediate response from the markets.
As announced by the Chairman, the Fed raised the target range for interest rates: the raise corresponds to 25 basis points – or 0.25 percentage point, which leads the range to 5%.
There are some main points to consider when analyzing Powell’s speech:
- The US economy slowed in 2022.
- The real estate market remains weak – due to higher mortgage rates.
- The labor market is troubled. The unemployment rate is low, and this further contributes to higher inflation. According to Powell, the offer exceeds the demand, creating pressure on wages.
- Inflation is higher than the Fed’s goal set at 2%. To analyze the current situation, Powell mentioned the PCE – Personal Consumption Expenditures. Simply put, this index measures what percentage of income people spend for certain goods or services. Excluding more volatile products like food and energy, PCE stands at +4.7%. Despite the measures taken by the Fed to fight inflation, Powell clarified that taking inflation to 2% “has a long way to go”.
- As expected, credit conditions will be tight, both for people and businesses.
In the short run, the effects of these measures will be closely monitored to assess what the possible outcomes can be. But Powell clarifies where all this is headed: reaching the higher employment rate possible while keeping prices stable.
How markets responded to Fed’s higher rates
The stock market didn’t react very well. After days of rising prices, the FOMC meeting threatened to erase the profits of investors.
Just to show you how the S&P 500 performed:
This index tracks the prices of the stocks of the 500 largest companies in the US, and for this reason is used to understand the general sentiment of traders and investors.
Even some insiders of the BofA – Bank of America – suggested traders and investors to sell their stocks instead of buying, since – according to the group – the next bubble is about to burst.
Despite this, traders and investors try to avoid panic – or, at least, to find alternative means to protect their funds.
This is the chart of Bitcoin:
The chart might seem very similar to the one we showed previously, but at a closer look, we can see that the volume needed to cause the drop on March 22 is lower – and it’s not above average.
To use Wyckoff’s terms, effort didn’t correspond to results: the public doesn’t seem to join the downward movement.
In simple terms, it looks like Bitcoin is still investors’ choice when it comes to finding a good hedge against inflation and uncertain economic and financial conditions.
When will the banking crisis end?
To be honest, it seems that what we’ve seen so far is more the beginning of a crisis.
According to a study published by the Social Science Research Network right after the collapse of Silicon Valley Bank, 186 other US banks are at risk if panic doesn’t stop spreading. In fact, if people decide to withdraw their funds, these banks wouldn’t have the capability to deal with a failure.
The issues faced by First Republic, a bank closely tied to SVB, are another proof of the fact that the decision to raise interest rates is a double edge sword – at least in the short run.
Right now, the major concern of governments and regulators should be avoiding bank runs.
In the meantime, things in Europe don’t seem to be calm: despite the head of the European Central Bank Christine Lagarde saying that European banks are safe, we’ve already witnessed the issues faced by Credit Suisse.
Moreover, Deutsche Bank stocks plunged, and the CDS – Credit Default Swaps – of the bank reached the highest level in over four years.
Credit Default Swaps represent a form of insurance bought by bondholders, meaning that investors are extremely nervous and not so sure about the stability of the European banking system.
Effects of rising Fed’s rates on the fintech industry
The current decision of increasing interest rates is the main tool of regulators against inflation, but also a part of a general stricter attitude of regulators for what concerns financial institutions.
Among these, we could include fintech companies and firms. Banks are traditionally less innovative than fintechs, they’re more regulated and have more extensive experience in the financial sector.
This means that, when something bad happens, banks have more tools to find solutions — and help.
Moreover, the current crisis became evident when fintech and tech companies started slowing after the (unsustainable) growth they witnessed during the pandemic. This caught the attention of regulators, who started having a closer look at fintechs and the crypto space.
But as we know, fintech provides alternatives.
Despite issues, we have to consider that businesses – especially SMEs – form a consistent part of our economies. Now, if businesses won’t find reliable support from banks, they can always move towards other tech-based solutions.
Just by considering a couple of examples, it is clear that businesses and investors are shifting their focus on something different:
- The fintech Mondu launched B2B BNPL – Buy Now, Pay Later alternatives for businesses – also in the UK;
- Two, a Norwegian fintech startup, has just raised €18 million in a series A funding round.
Both these fintech are focused on offering agile alternatives to businesses that might struggle because of the current banking situation. And these are just two examples of how we learnt something after the 2008 crisis.
Moreover, as Pascal Gauthier, CEO of Ledger, observed, the crypto space is the major hedge against centralization. In other words, all this regulatory activity and centralized decisions are moving people towards cryptos and decentralized solutions.
Actually, if we have a look at the data, we can confirm Gauthier’s words.
As reported by DefiLlama, DeFi TVL reached around $50 billion – 12 billion more than the beginning of 2023:
Source: DefiLlama. TVL stands for Total Value Locked: this metric is used to track the health of DeFi (Decentralized Finance) projects and to understand how much liquidity people deposited in decentralized protocols.
The current banking turmoil and global economic and financial conditions are a test bench for fintech.
With the breakout of the pandemic, a relatively young and hyped industry didn’t manage to correctly deal with an unexpected and dramatic event. The growth was as rapid as its fall. But if fintech manages to keep sustainable models, fintech companies will be able to at least mitigate the effects of a global crisis.
Even if we spotted many similarities with the 2008 crisis, the current situation might not be as bad as 2008, for the simple reason that we have more tools today – but we need to use them responsibly.
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