Federal Reserve faces critical week as crisis fears linger

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As fears over a global financial crisis proliferate and inflation in the US remains elevated, the Federal Reserve will face a near-impossible decision this week when it meets to determine how much to raise interest rates — if at all.

The Fed's bind, in a nutshell: keep raising interest rates and risk further instability in the US banking system, or do nothing and watch inflation pick up pace again? Fed officials will gather on Tuesday and Wednesday in what is likely to be the most closely watched meeting in recent memory, as markets remain on edge following the collapse of Silicon Valley Bank (SVB) and Signature Bank.

The Fed has spent months aggressively raising rates in a bid to tamp down inflation, but it is those same high rates that are putting banks under pressure.

SVB collapsed after it sold about $22 billion worth of securities at a loss amid the Fed's heightened interest rates, leading to a sudden run on deposits.

The Fed's current target range is 4.50 per cent to 4.75 per cent, and traders expect the central bank to raise interest rate by another 25 basis points on Wednesday, figures from the CME Group show.

But Goldman Sachs expects the Fed will not raise interest rates due to the continued banking crisis.

“While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and mid-size banks will prove sufficient,” Goldman Sachs economist David Mericle wrote in a note on Monday.

UBS takeover of Credit Suisse fails to calm investors
In a two-day visit to Capitol Hill on March 7-8, Fed Chairman Jerome Powell strongly suggested that the central bank was poised to return to its aggressive rate increases after scaling back its size in its previous meetings.

But that was before the collapses of SVB and Signature sent shock waves across the global financial marketplace. And shares of First Republic, which received a $30 billion rescue package last week, continued to tank on Monday.

Banking crisis fears have extended into Europe where, at the weekend, UBS rescued its rival bank Credit Suisse in a $3.25 billion takeover that was brokered by the Swiss central bank over concerns that a collapse would trigger a global crisis.

Mr Powell and Treasury Secretary Janet Yellen said in a statement supporting the takeover that the US “financial system is resilient”.

Shares of Credit Suisse plunged as much as 60 per cent on Monday.

Separately, the Fed offered daily currency swaps with its counterparts in Canada, the UK, Japan, Switzerland and the European Central Bank.

The chaotic developments in the banking sector only complicate things for the Fed. Raising interest rates would add pressure to a sector that is already under substantial stress. Still, the banking crisis is only one significant factor the Fed must consider.

If the Fed does pause interest rates, it would signal that inflation will exist for a little while longer and Americans would continue having to pay heightened costs for everyday goods.

Inflation in the US currently sits at 6 per cent, stubbornly above the Fed's 2 per cent target.

And while wage growth is showing signs of cooling, the labour market remains tight, with 311,000 jobs added in February. There are currently 1.9 positions available for every jobseeker.

For now, traders believe that the latest economic data will guide the Fed's decisions this week, expecting an interest rate of 25 basis points.

Doing so would inch rates closer to the Fed's end-of-year projected rate of 5.1 per cent, though Mr Powell suggested rates would likely exceed those estimations by year's end.
Source: https://www.thenationalnews.com

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