According to minutes from the Federal Reserve's March meeting, economists predict that turmoil after the collapse of several banks will cause a "mild recession" later this year.
This forecast has led Fed officials to envision fewer interest-rate increases this year, out of concern that banks will reduce their lending and weaken the economy. The uncertainty in the banking sector also influenced Fed officials' decision to raise their key interest rate by just 0.25 percentage point, rather than a half-point, despite signs that inflation was still too hot.
The minutes reveal that the Fed's prediction of a recession depends on how severe the banking industry's troubles prove to be and to what extent they will cause a cutback in lending.
Before the collapse of Silicon Valley Bank, many officials said they had expected to raise rates several more times this year. Instead, Fed officials agreed that the collapse of the two large banks "would likely lead to some weakening of credit conditions" as banks sought to preserve capital by curtailing lending to consumers and businesses.
What does it mean for investors?
In general, reducing interest rates can stimulate economic growth by lowering the cost of borrowing. This encourages spending and investment, leading to higher aggregate demand and economic growth. However, the impact of interest rate cuts on the economy depends on various factors.
For instance, if banks do not pass on the base rate cut to consumers, the interest rate cut may have little effect. As informed investors, it is prudent to diversify our portfolios to manage risks and maximize returns.
While cryptocurrency performance can diverge from that of the stock market and often outperforms it, there are other assets that are also independent of the stock market. These include real estate investment trusts (REITs), infrastructure, emerging market debt, investment-grade credit, and commodities. Investors may consider allocating a portion of their portfolios to these assets as well.
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