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Fed poised to approve quarter-point rate hike next week despite market turmoil

BusinessEconomyFed poised to approve quarter-point rate hike next week despite market turmoil
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Even with the turmoil in the banking industry and further uncertainty, the Federal Reserve will approve a quarter-percentage-point interest rate hike next week, according to market pricing and several Wall Street experts.

Rate expectations have been on a pendulum swinging sharply over the past two weeks, varying from a half point increase Some say the Fed may cut rates by holding the line and even at one point.

However, a consensus has emerged that the Fed chairman Jerome Powell And their fellow central bankers would like to signal that while they are used to financial sector turmoil, it is important to keep fighting to tame inflation.

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This will likely take the form of a 0.25 percentage point, or 25 basis point, increase, with the assurance that there is no predetermined path forward. The outlook may change depending on market behavior in the coming days, but there are signs of a Fed hike.

US Federal Reserve Chairman Jerome Powell addresses reporters after the Fed raised its target interest rate by a quarter percentage point during a news conference at the Federal Reserve Building in Washington on February 1, 2023.

Jonathan Ernst | reuters

“They have to do something, or they’ll lose credibility,” said Doug Roberts, founder and chief investment strategist at Channel Capital Research. “They want to do 25, and 25 sends a message. But it will really depend on the comments that Powell says publicly. … I don’t think he’s going to do a 180-degree shift about what Everyone’s talking.”

Markets largely agree that the Fed is going to hike.

As of Friday afternoon, there was about a 75% chance of a quarter-point increase cme group data Using fed funds futures contracts as a guide. Another 25% were in the no-hike camp, speculating that policymakers may be taking a step back from the aggressive tightening campaign that began a year ago.

Goldman Sachs is one of the most high-profile forecasters to see no change in rates, as it expects central bankers in general to “take a more cautious short-term stance to avoid worsening market fears of further banking stress.”

question of sustainability

Whichever way the Fed goes, it is likely to face criticism.

“This may be one of those times where there is a gap between what they should do and what I think they will do. They certainly shouldn’t tighten policy,” said Mark Zandi, chief economist at Moody’s Analytics. ” “People are really on edge, and any little thing can push them over the edge, so I don’t understand it. Why can’t you pivot a little bit here and focus on financial stability?”

Rate hike comes just a week after other regulators launched emergency loan facility To prevent a crisis of confidence in the banking industry.

With news of the shuttering of Silicon Valley Bank and Signature Bank volatility elsewhereShook financial markets and set off apprehensions of what was to come.

Zandi, who is not predicting any rate hike, said it is highly unusual and dangerous to tighten monetary policy under these circumstances.

He said, “You’re not going to lose your fight against inflation with a standstill here. But you might lose the financial system.” “So I don’t see the rationale for tightening the policy in the current environment.”

Still, most of Wall Street thinks the Fed will move forward with its policy direction.

Cut still expected by end of year

In fact, Bank of America said Last Sunday’s Policy Steps The backstop allows the Fed to increase flexibility to support depositor cash and liquidity-strapped banks.

Bank of America economist Michael Gapen said in a client note, “The recent market turbulence stemming from the crisis at several regional banks certainly calls for greater caution, but there is little room for policymakers to trigger systemic risk exceptions.” Strong action … likely to limit downside.” “That said, events remain fluid and other stress events could materialize between now and next Wednesday, causing the Fed to pause its rate hike cycle.”

Indeed, more bank failures over the weekend could throw policy for a loop again.

An important caveat to market expectations is that traders do not think there will be further rate hikes. Current pricing indicates a rate cut, keeping the Fed’s benchmark funds rate in its roughly 4% target range through the end of the year. Wednesday’s hike will range between 4.75%-5%.

Citigroup also expects central banks to “refocus on fighting inflation, which requires further hikes in policy rates,” the firm said in a note.

However, markets haven’t had the benefit of hearing from Fed speakers since the financial turmoil began, so it will be hard to predict how officials feel about the latest developments and how they fit into the policy framework.

The biggest worry is that the Fed’s moves to curb inflation will eventually lead the economy into at least a shallow recession. Zandi said a hike next week would raise those odds.

“I think the more rational heads will prevail, but it is possible that they are so focused on inflation that they are willing to take their chances with the financial system,” he said. “I thought we could make it through this period without a recession, but it would require some good policymaking by the Fed.

“If they raise rates, that qualifies as a mistake, and I would call it a big mistake,” Zandi said. “The recession risk will become meaningfully higher at that point.”

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