Expectations are high that the Federal Reserve will raise interest rates by a quarter point next week, but the central bank can still change policy quickly if the financial system becomes stressed. After a wild ride, the feeding of futures funds is reflected in more than 80% odds that the central bank will raise rates by 25 basis points next Wednesday. A basis point is equal to 0.01 of a percentage point. Ethan Harris, head of global economic research at Bank of America, said he really expects the Fed to raise it by a quarter point, but the central bank can change course if necessary. “We have the Fed hiking three 25 basis point hikes, including next week,” he said. “This is assuming that regulatory efforts to support the banking system are effective and negative news is more limited, so the Fed can shift its focus back to inflation. It’s a close call for next week because it really depends on what the market does when the Fed meets.” On Thursday, stocks closed higher, with regional bank shares rising. Treasury yields also rose as investors learned that a consortium of 11 banks agreed to put $30 billion into First Republic Bank. Participating institutions include JPMorgan, Citigroup, PNC and Truist. Earlier, the European Central Bank continued its rate hike by half a point. Concerns about the health of Credit Suisse were also calmed after the Swiss National Bank on Wednesday said the bank was well capitalized and would provide liquidity if needed. Liquidity Worries about bank contagion after the failure of Silicon Valley Bank drove buyers to Treasurys and pounded risk assets, like stocks and oil. The 2-year Treasury yield has traded in big swings since then. The yield, which best reflects Fed policy, rose to 4.17% in late trade Thursday, from a low of 3.9% in morning trade. Yields move the opposite price. Market odds for a Federal Reserve rate hike rose sharply Thursday, from 50% Wednesday. That hope has swung wildly. They are at 50% after Wednesday’s big change, but there are also traders who expect a half-point increase before the failure of Silicon Valley Bank. When the news broke on First Republic, the probability was at one point above 85% Thursday afternoon before falling back to closer to 80%. Economists have mixed views on how the central bank will respond to the failure of US banks and worry about Credit Suisse. JPMorgan economists expect the Fed to raise rates next week and once more in May. But Goldman Sachs economists said policymakers would hold off on the hike. Moody’s Analytics expects no rate hikes and expects the Fed to signal it is done with hikes. “It’s a fluid situation. If you’re the Fed, you want to be very flexible here,” Bank of America’s Harris said. “If you go to a meeting with the market in stress, there is a good enough case not to hike. On the other hand, if the situation is calm and you feel good about containing the crisis, you may precede the rise. It is a positive signal for the market. Said the Fed does not panic.” The opportunity to reverse the course, if necessary Harris said that the Fed increases, there is a precedent for the central bank to temporarily reverse the course if the situation turns bad. “Let’s just say regulatory measures and targeted approaches to support individual institutions don’t seem to be working,” he said. “At some point, the Fed may cut rates to deal with financial problems.” For example, in 1987, the central bank raised rates after the stock market crash and then continued hiking again, Harris said. In addition, the Fed lowered rates in 1998 due to Long-Term Capital management, but then returned to hiking. “This is a good example of how the Fed can tackle two problems at once,” he said. “You deal with the crisis immediately, and when the situation calms down and the situation becomes less fragile, you return to your regularly scheduled program.” Harris said the economy could see some impact. “I would be surprised if there is no negative impact on the growth picture, even if the crisis ends quickly,” he said. “It’s another little warning sign for people that the economy is going to weaken.” If the economy is strong enough, the Fed could send the wrong message if it doesn’t hike. “If they don’t step up when the economy is strong, then it looks like there’s a skeleton in the closet,” Harris said. He said that unlike during the great financial crisis of 2008, the financial system does not appear to be vulnerable, and consumers are better off. “At this point in time, you don’t have a big sector like the housing market with a big collapse in credit standards,” Harris said. “You’re stress-testing the economy and the market when rates rise… It’s like Warren Buffett’s expression: You find yourself swimming naked when the tide goes out.” Harris said it is not surprising that there is some fallout from the speed and magnitude of the Fed’s policy moves, which began a year ago when the central bank raised rates from zero for the first time. The current food fund rate range is at 4.50% to 4.75%. “The Fed went from being really dovish to extremely hawkish. Some institutions are going to get into trouble when there is a dramatic shift in the interest rate environment,” he said.