Federal Reserve Raises Interest Rates for The Tenth Consecutive Time

On 3 May, the Federal Reserve announced an interest rate hike of 25 basis points, or a rise of 0.25%. Since March last year, the Fed ended the era of zero interest rates maintained for four years, opened the channel of interest rate hikes, and in more than a year of consecutive interest rate hikes, the rate hike after the U.S. federal funds rate increased to 5.00%-5.25% range, a new high since 2007.

The Federal Reserve in the May interest rate meeting statement deleted a sentence that appeared in the last statement, "The Committee expects that some additional policy tightening may be appropriate." The market generally accordingly expected the Fed will pause in the June rate meeting to raise interest rates.

After this rate hike, the reaction of the major stock markets was not great, with U.S. stocks closing slightly lower, while Hong Kong and China A-shares rose slightly. The main reason is that the magnitude of this rate hike is in line with market expectations, and the rate hike has reached the terminal interest rate zone previously given by Fed officials in 2023, so the market expects more than a year of interest rate hike channel will come to an end.

On 1 May, JPMorgan Chase announced the acquisition of the vast majority of the assets of the failed First Republic Bank. This is the third large bank to fail in the United States in two months. The market expects the Fed to slow down its rate hikes in response to the pressures facing the banking sector

In the past two months, three large U.S. banks have failed in a row: Silicon Valley Bank, Signature Bank, and First Republic Bank. The size of their deposits were $175 billion, $110 billion, $103.9 billion.

The pressure they face mainly stems from their own poor risk control, but it is not unrelated to the Feds interest rate hike.

Silicon Valley Bank, for example, after the outbreak of the new crown epidemic, home office entertainment to stimulate the technology boom, coupled with the Federal Reserve interest rate cuts, "water", to the technology companies as customers of the Silicon Valley Bank suddenly absorbed tens of billions of deposits, and most of the funds invested in the U.S. government long-term bonds.

At that time, the market interest rate was close to zero, even if the U.S. government long-term bonds only pay a few percentage points of interest, the bank is still profitable.

However, the Federal Reserve has been raising interest rates aggressively to curb inflation, with rates rising to 4.75 per cent over the past year. Higher borrowing costs have weakened the momentum of technology stocks, and valuations of technology companies have fallen, affecting Silicon Valley banks that rely on the technology industry.

At the same time, bond returns have fallen in the rate hike environment, leaving Silicon Valley banks with large holdings of long-dated U.S. debt at a heavy loss.