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Is Fed Using 2004-07 Playbook?

Yesterday Federal Reserve hiked the interest rates by another 0.25% taking the rates to 5-5.25%. As this was expected there was not much movement in the swap market post-policy release. The market did start to adjust as a last hike because of the removal of words in the speech that signalled more rate hikes ahead. But when Fed Chair mentioned that a pause wasn't discussed.

The speech focused on financial stability and how credit tightening will impact economic growth. There was also mention of the risk of the debt ceiling was not raised. And at last, it was about a possibility of a mild recession but Chair Powell personally felt that it would only slow growth.

As the speech ended the regional banks started to fall in double digits. Within this period one specific bank called PacWest Bancorp announced plans for fundraising or a sale. This accelerated the fall to 30-50% in some stocks. Within a few hours, one of the biggest hedge fund managers tweeted a warning to FDIC and Sec. Yellen to save the regional banks.

But if the speech was something to go by then there was a mention that Bank consolidation was already happening and might continue to happen.

If history is to be looked at, then FED might have reached August 2006 which was the last hike and it was not announced as the same. And if the pattern is similar then the first rate cut happened in August 2007 one year after the last hike but before the recession in December 2007.

Will the rates remain high during the recession this time?


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