Why I think the FED will continue to raise rates in the next FOMC meeting despite the banking crisis
FED determination
The FED has been vocal about its commitment to bringing down inflation and achieving price stability. As a result, it has raised interest rates aggressively, and signs of inflation finally seem to be coming down. What we did not expect is the recent bank failures
2nd and 3rd largest bank failure in US history
The recent 2nd and 3rd largest bank failure in US history has taken many by surprise. The banks were unable to loan out money as quickly as depositors wanted to deposit their funds to take advantage of the current high interest rates in their savings accounts. As a result, the banks decided to purchase treasuries and earn an income to continue operations, but as interest rates continue to rise the price of these securities drop significantly and when news of these losses broke, depositors panicked and a bank run occurred, leading to the banks' collapse.
In response to this crisis, the Fed has announced that it will backstop every bank's deposit. This announcement carries significant weight, as the fiat system in theory is built on trust. With this move, the Fed hopes to prevent further bank failures by ensuring that depositors remain confident and trusting that their money is safe
It is worth nothing the fund provided by the FED is only used to backstop the current deposits and not for banks to use these funds for any other purposes and these funds will not create an inflationary woes to the economy
Conclusion
Despite this crisis, I believe the Fed will maintain its current stance on hiking interest rates to terminal rate, likely a 25bps this time round. It is likely that the terminal rate will be held until the end of this year, and the Fed may cut rates as aggressively as it raised them next year in the hope no further damage is done by then.
It is worth noting that stocks may bottom out before the Fed changes its stance. To prepare for this eventuality and to prepare for other unforseen crisis in the future such as the recent banking crisis I recommend holding a sizeable cash reserve and slowly DCA into attractive companies
$First Republic Bank(FRC)$ $VIX Volatility Index(VVIX)$ $SPY(SPY)$
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might lead to world war 3 if a major country collaspe
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