WASHINGTON — The Federal Reserve is widely expected to raise borrowing costs by a quarter of a percentage point on Wednesday for its 10th consecutive rate hike since March 2022.
Fed officials face a complicated backdrop heading into this week’s meeting. Risks to the financial system loom large, but inflation also remains stubborn.
The banking system has been in turmoil since the failure of Silicon Valley Bank on March 10th. Government officials raced over the weekend to find a buyer for First Republic. The First Republic has been struggling for weeks and an early announced deal sold him to JPMorgan his Chase. Monday morning.
Some of the turmoil in the banking sector has been attributed to the Fed’s rapid interest rate hikes over the past year. The central bank is expected to raise interest rates to just over 5% from near zero in March 2022 this week. After a series of quick adjustments, many lenders are facing losses on older securities and loans that pay relatively low interest rates. Compared to new securities issued in a world of high interest rates.
The job market has maintained some momentum despite moves by the Fed intended to curb rapid inflation by slowing the economy, with inflation showing staying power. data released last week show wages continue to rise rapidly at the start of the year. Inflation has slowed, but it is increasingly fueled by rising service prices, and shows little sign of abating. This could make it difficult for the Fed to tackle price increases fully back to its slow steady target.
Policymakers will show how the public thinks about Wednesday’s economic crisis in a post-meeting statement at 2 p.m. The Fed doesn’t release new economic forecasts at this meeting, so he’s only released once a quarter. Investors His 2:30 p.m. press conference with Fed Chairman Jerome H. Powell will give us a clue as to what happens next.
Fed may hint at suspension
When Fed policymakers released their economic forecasts in March, they expected interest rates to rise to a range of 5-5.25% in 2023.
If the authorities adjust policy as expected this week, interest rates will rise to that level. The question is, do they think that’s enough, or do policymakers think the economy and inflation are resilient enough that borrowing costs need to be adjusted further to cool things down and bring inflation down completely? whether or not
Mr. Powell may signal at the press conference or choose to keep the Fed’s options open. This is what some economists expect.
“Nothing needs to be left out,” said Brelina Urchi, chief U.S. economist at T. Rowe Price. She said, “The worst-case scenario for them is to let them know they’re done and the data forces them to make a U-turn.”
Investor expectations The Federal Reserve will stop interest rates starting this week, keeping rates on hold for a few months before starting to cut them significantly, bringing them to the 4.5-4.75% range by the end of the year.
However, Fed policymakers insist they don’t expect a rate cut anytime soon. Others have hinted that further hikes could be justified if inflation and economic strength show persistence.
“Monetary policy needs to be tightened further,” said Christopher Waller, the president of the Fed and one of the central bank’s more inflation-focused members. April 14th speech“It will depend on future data on inflation, the real economy and the extent of tightening in credit conditions.”
Bank turmoil impacts policy
The Federal Reserve has made it clear that upheaval in the banking system could slow the economy, but policymakers don’t know how much.
Bank troubles are different from other types of business woes. Because banks are like the yeast in the economy’s sourdough starter. If banks don’t work, nothing grows. They lend money to people who want to buy homes, people who want to buy new cars or garage additions, and businesses that want to expand and hire.
It is clear that banks will cut lending at least somewhat in response to the recent turmoil. Signs of cases are already emerging across the country. The question is how severe the change will be.
“If the recent response to banking problems leads to monetary tightening, then less monetary policy is needed,” said Austan Goolsby, president of the Federal Reserve Bank of Chicago. April 11th Speech“It’s not clear how much less.”
He noted that private sector estimates suggest that the hit to growth from the bank disruption could be equivalent to a 1-3/4 percentage point rate hike. This estimate was made long before the fall of the First Republic, after the troubles began.
Economic resilience matters
One of the big questions for the Fed, and it matters to everyone, is whether the U.S. economy can creak through this episode without slipping into a painful recession.
Fed staff said at the March central bank meeting that they expected the economy to experience a “moderate recession” following the recent bank turmoil. And Fed officials, including Mr. Powell, have suggested a recession is possible as officials try to slow the economy enough to keep inflation under control.
But it’s not clear how painful it would be if a recession hit. Some economists warn that recessions usually stack up on their own. This is because people will refrain from spending large amounts in response to small weaknesses in the economy. It may be difficult to push the unemployment rate up just a little bit without pushing it up significantly.
Some have noted that the post-pandemic economy is a strange one, characterized by unusually strong corporate profits and many job openings. The economy may cool more slowly than in the past as there may be room to squeeze margins and reduce unfilled positions. It’s called a “soft landing”.
Powell will get a chance on Wednesday to consider what he thinks are the most likely outcomes.
