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The Federal Reserve is set to announce its latest interest rate policy on Wednesday, a decision more in doubt than it was nearly a month ago due to a smoldering crisis in the US banking system.
Most economists watching the US central bank expect it to raise trendsetting interest rates by a quarter of a percentage point, as part of its ongoing campaign to fight inflation into submission.
That would bring US interest rates to nearly five percent, the highest level in 16 years.
But events in the financial sector over the past few weeks have made those predictions less certain.
Silicon Valley Bank (SVB) collapsed earlier this month, pushed into insolvency by the bank’s sudden opening that saw depositors withdraw billions of dollars from the bank in a few days, an exodus that the bank did not have funds to come up with.
The capital crisis that started at SVB was followed by the failure of another major bank, Signature Bank. A third, First Republic Bank, was saved from collapse by a $30 billion cash infusion. More and more are believed to be teetering.
Although the causes are different, they share a common theme: the inability to withstand the impact of higher interest rates, while investors and savers become fearful of bank finance. SVB’s problems began when it had to sell $20 billion in government bonds at a loss, as the Fed’s rate hikes had made the bonds older and cheaper.
The war on inflation may come at a cost
Like many central banks, the Fed has raised interest rates to curb inflation, which peaked at more than nine percent last summer.
The latest data shows the official US inflation rate has fallen to six percent. That’s still twice as high as the U.S. central bank expects, so all things being equal, the Fed usually has little to worry about raising again.
But fears of a banking crisis could prompt central banks to be more cautious.
“Recent thinking has shifted to how much support the Fed should provide to boost confidence in the US banking system and avoid panic,” said Colin Cieszynski, head of market strategy at SIA Wealth Management in Toronto.
Just two weeks ago, US Federal Reserve Chairman Jerome Powell told lawmakers that the central bank was willing to raise rates as much as necessary to control inflation – words that investors interpreted as meaning a whopping 50 basis point increase. desk.
But that was then and this is now. Traders on Wednesday priced in about two-thirds of the possibility of a small increase of 0.25 percent. That means there is a one in three chance the Fed will stand pat.
Futures markets have even indicated there is hope that the Fed will actually cut rates by a third by the end of this year.
Treasury Secretary Janet Yellen told a banking conference on Tuesday that the situation is “stable” and the system “remains sound” but reiterated that the US government will take whatever steps are necessary to make depositors safe.
Another rate hike will only increase the chances of US lenders being squeezed, so investors think the Fed will put its money where its mouth is and raise interest rates higher in order to curb inflation.
“This is a clear message from many officials that they are not taking this banking turmoil lightly and that they will probably be proactive when there are major risks,” said analyst Edward Moya with foreign exchange firm Oanda.
The Fed is set to unveil its rate decision at 2 pm ET. Chairman Powell will explain the bank’s line of thinking at a press conference after the announcement.
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