Uncertainty Pervades as the Fed Weighs Raising Interest Rates

The Federal Reserve’s decision to increase its benchmark policy rate is still uncertain among traders and economists after new moves by the world’s leading central banks to ease banking pressures and the repercussions from the acquisition of Credit Suisse left markets on alert.

March marks the start of the U.S. central bank’s two-day policy conference, during which decision-makers will debate if the still excessive inflation warrants raising interest rates or whether the upheaval in the financial markets outweighs those worries. The present range of targets of the Fed is 4.5%–4.75%.

“I don’t think the Fed has any good options here. The risk is allowing inflation to become even more embedded versus the risk of aggravating a broader banking crisis,”

said Tim Duy, chief U.S. economist at SGH Macro Advisors.

Prices for Fed funds contracts indicated a small tightening in predictions relative to last week’s conclusion, with a roughly 70% probability of a quarter-point rate hike against an approximately 30% possibility of no change.

During the previous ten days, price volatility has fluctuated greatly, with investors anticipating a larger half-point rate increase before banking difficulties appeared to at one time viewing rates flat. Those economists who forecast a quarter-point increase do not rule out the possibility of a pause.

In an effort to avoid disturbing financial markets, the Fed typically likes to announce the anticipated results of its monetary policy meetings in advance, but the rapid-fire events of the past 10 days, which included the failure of two U.S. regional banks and the weekend rescue of Credit Suisse by its bigger competitor UBS, have thrown off those conventions.

To relieve funding pressures on international markets, the Fed extended daily swaps of currencies to banks in Canada, Britain, Japan, Switzerland, and the eurozone. Despite this concerted move, banks only withdrew a little amount. Additionally, the Fed is currently setting up an emergency financial backstop for American banks.

The turmoil has taken place during the pre-meeting blackout phase of the central bank, which precludes officials from publicly stating how they view the issue.

“Barring a catastrophic collapse of the banking sector between today and Wednesday — one that reverberates globally — they will be focused on developments in the economy, which currently supports more policy tightening,”

said Rubeela Farooqi, chief U.S. economist at High-Frequency Economics, who predicts a quarter percentage point rate rise.

She cited a number of current economic data points, notably a significant inflation report released last week, that indicate that price increases are not completely under control. She predicted that the Fed would this week raise its median prediction for the funds’ rate at year’s end from 5.1% to 5.4%.

By the Fed’s favored measurements, inflation continues to hover at 5.4%, much above the target rate of 2%, albeit having dropped from its highs.

The European Central Bank stuck with a 50 basis point rate rise, believing that it might separate its monetary policy moves to battle high inflation from those necessary to allay concerns about financial security. This provided the Fed with something of an example in recent days.

A halt at the meeting this week, according to Goldman Sachs analysts, will be caused by the present state of affairs and aided by a steep decline in forecasts for near-term inflation. The policy rate will thereafter peak in the 5.25–5.5% area, according to the investment bank, which anticipates three additional 25 basis point increases in May, June, and July.

“While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient. We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now,”

they claimed.

Information from Reuters

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