Foreign media reported on Friday (17th) that according to market pricing and many Wall Street analysts, the Federal Reserve (Fed) may still decide to raise interest rates by 1 yard next week despite the financial market is still in turmoil.
The Federal Reserve will hold its next policy meeting on March 21-22, but in the past two weeks, the market expects the Fed to raise interest rates next week has been changing, from raising interest rates by 2 yards to keeping interest rates unchanged. The Fed is expected to cut interest rates and suspend quantitative tightening (QT).
Federal Reserve Chairman Jerome Powell recently released a hawkish rate hike signal in congressional testimony, and the Federal Open Market Committee (FOMC) will continue to implement tightening policies and be data-oriented. Powell said officials would be open to accelerating the pace of rate hikes, ending in higher rates than previously expected.
However, Silvergate Bank, Silicon Valley Bank and Signature Bank collapsed one after another, and the banking storm even spread to Europe. The second largest bank in Switzerland shook the market and raised concerns about more events in the future.
After the First Republic Bank received $30 billion in capital from 11 large U.S. banks on Thursday, Wall Street believes that there are obviously some loopholes in the bank rescue plan. First Republic Bank, on the contrary, let the risk of First Republic Bank default spread to these big banks.
The Fed is preparing to raise interest rates by 1 yard next week
The market is currently expecting the Fed to raise interest rates by 1 yard next week to a range of 4.75% to 5%. The Chicago Mercantile Exchange’s (CME) FedWatch tool showed traders were pricing in a more than 60 percent chance of a 1-point rate hike and a less than 40 percent chance of a pause.
Citigroup expects the Fed to raise interest rates by 1 yard next week on the grounds that the US central bank will turn its attention back to inflation, which may require further rate hikes.
Stability issues
The banking crisis still exists and is likely to intensify. The international rating agency Moody’s downgraded the rating outlook of the US banking system to “negative” on Tuesday. Banks are expected to raise deposit rates to avoid capital outflows, but this Bad for profitability and forecasts rising loan delinquency rates.
Most Wall Street analysts believe the Fed will continue its tightening policy direction, but whatever approach the Fed takes is likely to draw criticism.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, judged: “The Fed may not yet decide whether to raise interest rates again next week. In our view, it is more important not to risk the stability of the system than to reiterate its determination to fight inflation. “
Goldman Sachs expects no change to the federal funds rate next week and expects U.S. central bank officials to take a more cautious stance in the near term given recent stress in the banking system and increased uncertainty about the impact on the economy.
Mark Zandi, chief economist at Moody’s Analytics, said: “The Fed should adjust a bit and focus on financial stability.”
Zandi has been predicting that the Fed will not raise interest rates, because tightening monetary policy in this situation is very unusual and dangerous.
“Would the Fed lose the possibility of curbing inflation by pausing rate hikes here, but it could lose the financial system, so I just don’t see the logic of tightening policy in the current environment,” Zandi said.
A rate cut is expected before the end of the year
The banking crisis clearly upended the Fed’s plans to keep interest rates higher for longer. The CME’s FedWatch tool shows that traders now expect the Fed to start cutting interest rates as soon as June and lower the benchmark interest rate to around 3.75% to 4.0% by the end of the year.
“The recent market turmoil sparked by troubles at several regional banks, while certainly more cautious, may limit the impact on Fed policy,” Bank of America economist Michael Gapen said in a note to clients. That said, developments remain Unstable, and between now and next Wednesday, other financial contingencies could emerge that would cause the Fed to pause its rate hike cycle.”
However, markets have yet to hear official Fed talk since the banking turmoil began, so it will be harder to gauge how officials view the latest events and how they fit into the policy framework. The biggest concern is that the Fed’s efforts to curb inflation will eventually tip the economy into at least a mild recession.
Zandi predicts: “The Fed may be so focused on inflation that it is willing to take risks in the financial system. I think the United States can get through this period without a recession, but it will require the Fed to do some pretty good work. policy.”
“If the Fed decides to raise rates, that’s a mistake, I think it’s an egregious mistake, and the risk of a recession will rise significantly,” Zandi said.
