U.S. Federal Reserve Chairman Jerome Powell addresses reporters after the Fed raises its interest rate target by a quarter percentage point during a press conference at the Federal Reserve Building in Washington, Feb. 1, 2023.
Jonathan Ernst | Reuters
Despite the turmoil in the banking industry and the uncertainty ahead, the Fed is likely to approve a quarter-point rate hike next week, according to market pricing and many Wall Street experts. says the house.
Interest rate expectations have swung rapidly over the past two weeks, ranging from a 0.5 percentage point hike to a maintenance line, and at one point the Fed even hinted at a possible rate cut.
But there has been a consensus that Chairman Jerome Powell and his fellow central bankers want to signal that it is important to continue the fight to bring inflation down while they go along with the upheaval in the financial sector.
It will likely take the form of a 0.25 percentage point or 25 basis point increase, with the assurance that there is no pre-set path ahead.
“They have to do something or they lose credibility,” said Doug Roberts, founder and chief investment strategist at Channel Capital Research. “They want to do 25, and 25 will send a message. But that’s going to depend on the comments that follow—what Powell is going to say in public. I don’t think we’re going to do the 180-degree shift that everyone is talking about.”
Markets are mostly in agreement that the Fed will raise rates.
As of Friday afternoon, the odds of a one-quarter point gain were about 75%, according to Reuters. CME Group data Use the Fed Funds futures contract as a guide. The remaining 25% were in the no-hike camp, expecting policymakers to take a step back from the aggressive tightening campaign he started just over a year ago.
Goldman Sachs is one of the most prominent forecasters that sees no change in interest rates, and central banks are generally expected to adopt a more cautious short-term stance to avoid exacerbating market concerns about further banking stress. We anticipate that we will adopt
Whatever direction the Fed goes, it could face criticism.
“It could be one of those times when there’s a difference between what they should do and what I think they’ll do,” said Mark Zandy, chief economist at Moody’s Analytics. not,’ he said. “People are really at stake and little things can push them to the limit, so I don’t understand. Why can’t we just pivot here a bit and focus on financial stability? ”
The rate hike is expected to come just over a week after the Fed’s other regulators announced it. To stem the crisis of confidence in the banking industry, we rolled out an emergency financing facility.
The shutdowns of Silicon Valley banks and signature banks, along with news of instability elsewhere, have rocked financial markets and raised fears that more banks are on the way.
Zandi, who expects no rate hikes, said it would be highly unusual and dangerous for monetary policy to tighten in such circumstances.
“By pausing here, we won’t lose the fight against inflation. But we may lose the financial system,” he said. “So I don’t see the logic of tightening up policy in the current environment.”
Still, most of Wall Street believe the Fed will drive policy direction.
Cuts still expected by the end of the year
In fact, Bank of America A policy move last Sunday to protect depositors’ cash and help banks with liquidity shortages would give the Fed more flexibility in raising rates.
Bank of America economist Michael Gappen said in a note to clients: “The recent market turmoil stemming from the woes of some regional banks certainly calls for more vigilance. Strong action by policymakers to trigger the systemic risk exception is likely to limit the impact.” “That said, the situation remains fluid and other stress events could occur between now and next Wednesday, and the Fed could pause its rate hike cycle.”
In fact, more bank failures over the weekend could put policy in a loop again.
One of the key caveats to market expectations is that traders don’t expect further rate hikes to continue. Current pricing points to rate cuts coming, and the Fed’s benchmark fund rate will stay within its target range of about 4% by the end of the year. If it goes higher on Wednesday, the range will be between 4.75% and 5%.
Citigroup is also forecasting a 0.25 percentage point rate hike because the central bank will “return attention to the inflation struggle, which is likely to require a further hike in policy rates,” the company reports. said in
But since the financial turmoil began, markets haven’t had the benefit of hearing from a Fed speaker, so it’s a question of how the Fed feels about the latest events, and how they shape the policy framework. It will be more difficult to determine if they are compatible.
The biggest concern is that the Fed’s anti-inflationary measures will eventually send the economy into at least a shallow recession. Zandi said a rate hike next week would make that more likely.
“I think the more rational heads will win, but they may be too focused on inflation and trying to seize opportunities in the financial system,” he said. “I thought we could get through this period without going into a recession, but that would require some pretty good policy decisions from the Fed.
Mr Zandi added, “Hikes are a mistake and I would call it a terrible mistake.” “At that point, the risk of a recession would be much higher.”