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Analysis- Financials or Price Stability? Fed tells face calls to pause

BusinessMarketsAnalysis- Financials or Price Stability? Fed tells face calls to pause
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By Paritosh Bansal and Ira Iosbashvili

March 18 (Reuters) , With the US and European banking crisis wreaking havoc on global markets, some financial industry executives are calling on the Federal Reserve to tighten its monetary policy for now but to resume raising rates later. Be prepared for

Investors are currently pricing in a 60% chance that the Fed will raise rates by 25 basis points on Wednesday, with the rest betting on no change. Some industry executives said the central bank should Prioritize financial stability now,

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“Work fast and hard on financial stability; Go slow and slow on price stability,” said Peter Orzag, chief executive officer of financial advisory at investment bank Lazard Ltd. laz.n, Orszag said the Fed should pause but be prepared to gradually hike again if the situation develops.

The central bank declined to comment. Fed officials are in their pre-meeting blackout period, during which they are barred from commenting on monetary policy or the economic outlook.

The Fed has raised interest rates sharply over the past year to tame inflation at a pace not seen since the 1980s. Others have joined in, with the European Central Bank raising rates by 50 basis points earlier this week.

A rapid rise in rates after years of cheap money is rippling through global markets and industry. Two US banks have failed in the past week and others have come under pressure, while Swiss lender Credit Suisse scrambling to pull together a rescue deal later this week.

Turmoil in the banking sector has pushed up asset prices, driving up US government bond yields plummeting Over the past week, some investors complained that massive price volatility made it more hard to do business, US stocks took a rollercoaster ride, with the S&P 500 closing higher for the week despite heavy losses in bank shares.

wild card

Some market observers have argued that a sustained pause could lead to concerns that consumer prices would spike.

Recent US economic data gives the Fed little reason to believe it has defeated inflation. Consumer prices rose at a 6% annual rate in February, nearly three times the central bank’s target, and there are only nascent signs of significant easing in hiring and wage growth.

Bob Schwartz, senior economist at Oxford Economics, wrote in a note, “While the banking crisis will certainly attract attention, we believe it is not systemic, but rather a liquidity issue, which the Fed is trying to contain with its lending facilities.” could.”

But he said the “wild card” would be the market’s response.

James Tabachi, chief executive of broker-dealer South Street Securities, said he thought the Fed would eventually need to go above 6%. The current fed funds rate is 4.5% to 4.75%.

“I’m an inflation hawk. But what would it hurt to wait a month and say, ‘We want to see the market stabilize?'” Tabachi said. “I think the Fed should give a pause.”

deflationary trend

Orczag, who served as director of the US Office of Management and Budget in the Obama administration, said that as long as long-term inflation expectations were stable, as was the case now, the Fed had time. Raising rates too quickly can break things, as the current banking crisis has demonstrated.

Several factors pointed to the lingering effect of the pandemic on inflation, such as supply-chain disruptions and demand for travel and entertainment.

In a new paper, Orzag and co-author Robin Brooks, chief economist at the Institute of International Finance, estimated that the lagged effect associated with delivery times could result in increased core PCE inflation between 30% and 70% in the fourth quarter of 2022. Can explain in between. He said it would work over time and become a deflationary force this year.

The recent turmoil in the banking sector is already tightening financial conditions, Torsten Slok, chief economist at Apollo Global Management, wrote in a note on Saturday. Slok wrote that the events of the past week are in line with a 1.5% increase in the fed funds rate.

“In other words, over the past week, monetary conditions have tightened to an extent where risks of a sharp slowdown in the economy have increased,” he said.

blackrock inc blk.n Strategists argued that last week’s volatility showed that markets had woken up to losses caused by rapid growth and were pricing in a bearish run.

“The trade-off for central banks – between fighting inflation and protecting both economic activity and financial stability – is now clear and urgent,” he wrote in a report earlier this week.

Fed view of 2023 policy ratehttps://tmsnrt.rs/3YCgSOv

Odds point to 25 bps Fed rate hikehttps://tmsnrt.rs/3Tn335y

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Graphic-fed view of 2023 policy rate https://tmsnrt.rs/3ZZktHy

Graphic-Americans choose to keep their money in bankshttps://tmsnrt.rs/3LrAFxq

Graphic – Most US banks oppose bailouthttps://tmsnrt.rs/408dP1Y

(Reporting by Paritosh Bansal and Ira Iosbashvili; Additional reporting by Dan Burns; Editing by Nick Zieminski)

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The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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