Octavio Marenzi, CEO at Opimas, weighs in on UniCredit’s latest earnings report and the outlook for the European banking sector.
02:03
6 minutes ago
Tag: Investment banking and brokerage
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Generative AI will have four major effects on banks, McKinsey & Company says
Violet Chung of McKinsey & Company discusses how prepared Asian banks are to adopt generative artificial intelligence.
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Why Fed rate hikes take so long to affect the economy, and why that effect may last a decade or more
The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.
The Fed’s leaders expect their interest rate decisions to eventually slow that growth.
The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.
“It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.
“Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”
A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.
“It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”
Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.
“We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”
Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.
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Wall Street wavers up and down as more earnings roll in
NEW YORK — Stocks wavered between gains and losses in early trading on Wall Street, leaving indexes mixed as another batch of companies reported their latest quarterly results.
Several companies including Netflix and United Airlines rose sharply while others, including Abbott Laboratories and M&T Bank, sank.
The S&P 500 shook off an early slump and was little changed as of 10:23 a.m. Eastern. The Dow Jones Industrial Average rose 56 points, or 0.2%, to 30,582 and the Nasdaq fell 0.1%. Smaller companies fell more than the rest of the market.
Stocks are coming off of two days of gains, but trading remains unsteady overall. Treasury yields rose back near multi-year highs. Crude oil prices rose slightly.
Homebuilders and other companies tied to the industry fell following a disappointing report on the housing industry. Construction on new homes declined more than expected in September. Homebuilder Lennar fell 4.4% and home-improvement retailer Lowe’s shed 5.1%.
The yield on the 10-year Treasury, which influences mortgage rates, rose to 4.08% from 4.02% late Tuesday. The yield on the two-year Treasury, which tends to track expectations for future Federal Reserve action, also rose to 4.52% from 4.43%.
U.S. crude oil prices rose 1.2% and energy stocks made gains. Exxon Mobil rose 2.2%. The White House plans to announce another release of oil from the U.S. strategic reserve.
Investors have been focusing on the latest round of corporate earnings this week. The latest results are being closely watched for clues about how companies are dealing with the hottest inflation in four decades and how they intend to operate through the rest of the year and into 2023.
Netflix soared 14.7% after the company said it picked up 2.4 million subscribers during the July-September period, a comeback from a loss of 1.2 million customers during the first half of the year.
United Airlines rose 7.2% after reporting strong third-quarter financial results. American Airlines will report its results on Thursday.
Household goods giant Procter & Gamble rose 2.2% after also reporting strong financial results. It joined a growing list of companies, including Hasbro and Johnson & Johnson, warning investors about a strong U.S. dollar cutting into revenue. A strong dollar decreases the value of overseas sales after converting the currency. The U.S. currency is now worth more than a euro for the first time in 20 years.
The U.S. dollar has gained strength versus currencies worldwide as inflation and recession concerns prompt investors to look for relatively stable investments. Central governments and banks worldwide are dealing with stubbornly hot inflation. British food prices rose at the fastest pace since 1980 last month, driving inflation back to a 40-year high.
The U.S. faces its own potential recession as high prices on everything from food to clothing barely budge and the Fed raises interest rates to temper inflation.
The Fed’s rate increases are meant to make borrowing more difficult and slow economic growth in an effort to tame inflation. The strategy risks stalling the already slowing U.S. economy and bringing on a recession.
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Joe McDonald and Matt Ott contributed to this report.