Does the Federal Reserve continue to raise interest rates despite the banking crisis?
Today, Wednesday, the Federal Reserve (the US Central Bank) completes its meetings that began yesterday, and the vision is still blurry regarding the decision expected within three hours, at a time when the bank is trying to drive the final nail in the coffin of the “ghoul” of the highest inflation in the country since For more than forty years, while the banking sector is suffering from a clear crisis, some fear that it will widen, if it is ignored.
For the first time in many years, economists are divided in their expectations of the decision of the largest central bank in the world, as reducing inflation requires proceeding with raising interest rates, while banks are crying out, secretly so as not to worry depositors, calling for providing cheap liquidity and stopping raising, even for a while.
After violent fluctuations in opinions and prices, it seems that the majority expects to raise the interest rate today by twenty-five basis points, or a quarter of a percentage point. First small investors, and even whales hedge funds and investment banks.
interest decision
And in the case of raising interest rates by a quarter of a percentage point, the range of 4.75% – 5% will be reached on the federal funds, for the first time since 2007, which witnessed the precursors of the global financial crisis.
As of midday Wednesday, futures and futures contracts indicate that markets expect a quarter-percentage-point hike, by more than 90%.
And at the beginning of this month, the markets had accepted and absorbed the interest rate hike by half a percentage point, until the closure of Silicon Valley and Signature Banks opened the door to stabilization, for the first time since 2021, in the hope of controlling liquidity disturbances in financial institutions, inside and outside the United States.
The Federal Reserve does not confine its responsibilities to US soil, as it always works through its role that it has assigned to itself, by being the central bank for central banks around the world.
The developments of recent years witnessed many decisions that support this role, the most recent of which was the announcement of extending liquidity lines, through currency exchange operations, with European central banks, to ensure the availability of dollar liquidity, following the Credit Suisse disaster.
Press conference
About half an hour following announcing the decision, Federal Reserve Chairman Jerome Powell begins his duel with journalists, who are desperately trying to find any word or sign that can shed a point of light on the future course of the next Federal Reserve decision, in the first weeks of May. May.
One of the key sentences, in the statement that Powell will read, will be, “The (FOMC) expects that continued increases in the target range will be appropriate, in order to achieve a monetary policy stance that is sufficiently restrictive to return inflation to 2% over time.”
Differences appeared in this sentence, in the data of previous meetings, since the start of the current interest rate hike cycle in March 2022, although there are expectations that this time it will change somewhat, to indicate a less certain view of more hikes in the coming times.
Moreover, Powell will be seen to provide assurances that the Fed is not on a predetermined path for hiking, and is well aware of the pressures that the current banking crisis is putting on the country’s monetary policy.
Journalists will be ready to count the times Powell will mention such words as “uncertainty,” “the financial system is safe,” “inflation under control,” and finally, “customer deposit protection.”
points chart
FOMC members populate their individual interest rate forecasts, quarterly, on a “dot chart”. Before the banking crisis, the expectations of officials and markets exceeded 5.10% in December, then 5.40% in early March. But most of those expectations changed following the Silicon Valley collapse.
As of midday on Wednesday, Goldman Sachs Bank still expects the Federal Reserve not to raise any rate today, although it is waiting for an interest rate hike of three-quarters of a percentage point, before the end of this year, to reach 5.375%.
“It does not make sense to tighten monetary policy amid the ongoing stress in the banking system, which might pose significant downside risks to the economy,” said David Merkel, the bank’s economist, in a note to clients.
Most expectations indicate that an increase of only twenty-five basis points will open the way for a few cuts before the end of the year, to return to the range of 4.25% – 4.50%.
Andrew Hollenhorst, economist at Citibank, wrote on Tuesday: “Markets are significantly underestimating the possibility that monetary policy rates will pick up and then stay higher for longer. But in our view, policymakers don’t give up everything to aggressively cut rates when Financial stability risks are rising.”
Hollenhorst cited many of the crises that the US and global financial system was exposed to, which are still fresh in our minds, as the Federal Reserve temporarily stopped raising and sometimes lowering interest, then quickly began to reverse course and raise interest once more.
