Key Takeaways:
- The Fed would announce its interest rates on March 22.
- A rise in interest rates might be harmful to risk assets like crypto.
NEW DELHI (CoinChapter.com) — Federal Reserve could save the US banks from a deepening crisis or risk crashing the entire economy as it proceeds with its interest rate decision this March 23.
The collapse of Silicon Valley Bank started a chain reaction that led to two banks shutting down and another bank being downgraded to junk by rating agencies. Furthermore, a new report by Stanford Business School found that 186 banks in the US are at risk of failure.
The report stated a rising interest rate and a high proportion of uninsured deposits, with the study examining the proportion of banks’ funding coming from uninsured accounts worth over $250,000.
If uninsured depositors start withdrawing their funds from the banks, the resulting run will risk nearly $300 billion of insured deposits.
The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets. […] Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment.
An excerpt from the report
Furthermore, the report noted that the Fed’s monetary policy resulted in “substantial losses in the value of banks’ long-duration assets.”
Meanwhile, the Federal Reserve recently created a new Bank Term Funding Program (BTFP). The fund would offer loans with a maximum term of one year to under-pressure financial institutions.
Ayako Yoshioka, Senior Portfolio Manager at Wealth Enhancement Group, told CoinChapter that banks must address unrealized losses on their balance sheets despite the slight respite in the banking system’s distress.
The additional stress that some [banks] are seeing in the commercial real estate market may continue to reverberate through the system. We expect volatility in the sector as well as in markets in general to remain elevated in the near-term.
Yoshioka told CoinChapter
However, the liquidity provision might affect Federal Reserve’s effort at shrinking its balance sheet, making the US monetary policy slightly looser in the upcoming meeting. A Reuters poll cited several economists to predict a 0.25% rate hike announcement by the Federal Reserve.
Interest Rate Hike and Its Impact On Risk Assets
Stocks
An increase in Fed rates could signal that the central bank is optimistic about the banking sector’s recovery. However, though bank stocks tend to perform favorably when rates rise, this might not be the case, given investors’ low confidence in the banking sector.
Yoshioka agreed with the market sentiment of a 25 basis point rise in interest rates. On the question of the impact on risk assets, she told CoinChapter,
The impact to risk assets could be mixed, but skew positively, as the Fed acknowledges the need to keep fighting inflation but commentary about a pause in the near future could ease further pressures in the banking system.
Furthermore, a rise in interest rates could propel the US dollar, negatively impacting companies that do significant business on international markets. For example, the chart above shows Microsoft’s (NASDAQ: MSFT) shares’ price action since 2020.
MSFT prices rose continuously during the lockdown when the Fed interest rates were near zero. However, as interest rates started rising, Microsoft stocks started falling. Finally, the tech giant’s shares started recovering in 2023 on speculation of the Fed backing off its hawkish stand.
Also Read: Ethereum Underperforms Bitcoin as Banking Crisis Deepens — How to Trade ETH/BTC in March?
Companies might delay borrowing funds to launch new projects if the Fed raises interest rates. Additionally, investors might not find stocks a lucrative investment option since the value of future earnings would look less attractive compared to more competitive bond yields.
If investors anticipate higher rates in the future, it reduces the present value of future earnings for stocks. When this occurs, stock prices tend to face more pressure.”
said Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
Per Forbes, market sentiment suggests that another hike might be the last if it comes, as recession fears might force the Fed’s hand. But, it might be likely that the Fed might remain hawkish until it gets concrete economic evidence of a recession.
However, if the Fed maintains its interest rates, the markets could interpret the move resulting from the banking turmoil. As a result, confidence in the market could fall, forcing a market decline.
Cryptocurrencies
Meanwhile, Bitcoin defied the wider crypto market trend, rising steadily since March 11 to surpass $28,000 for the first time since Jun 2022. However, the spike in BTC price might be a dead-cat bounce and force the prime crypto token to turn bearish.
A rise in interest rates could pull liquidity from the markets as people take advantage of higher rates and the safety of savings accounts. While Bitcoin’s price rose, other crypto assets like Ethereum (ETH) continued to bleed, further enforcing the narrative of BTC’s rally being a bull trap.
However, crypto optimists seem to outnumber realists, as the fear and greed index for crypto suggests a greedy sentiment among investors. Market participants could take advantage of the downtrend to load up tokens.
The future of crypto in 2023 is going to be driven by how much appetite for risk exists among the investor community. Right now, the market does not seem to have that appetite.
Dan Raju, CEO of Tradier, a brokerage platform told Bankrate
Additionally, if the Fed decides not to hike interest rates, it might indicate the central bank was backing down due to the banking sector crisis. The loss of confidence in the banking and traditional finance sector might benefit the crypto markets.
As a result, “markets may interpret that as the Fed assessing the banking industry being in worse shape than investors have been led to believe,” Yoshioka stated.
Federal Reserve Pivot Scenario
Crypto markets started the year on an uptrend after multiple catastrophes in 2022, from the Terra LUNA burnout to the FTX collapse. A key factor in the market turnaround was speculation of an impending Fed pivot due to softening inflation data.
Therefore, if the US central bank maintains its interest rates, the crypto market might rally upwards.
