Many Wall Street economists expected a quarter-point increase.
“You lose time on the fight against inflation if you wait,” said Michael Feroli,the chief US economist at JP Morgan. Still,Feroli had expected the Fed to raise its forecast for how high it would nudge rates this year,and he now expects them to leave their peak rate estimate unchanged at about 5 per cent. But a few thought the Fed would hit pause,including economists at Goldman Sachs.
‘We think Fed officials will share our view that stress in the banking system remains the most immediate concern for now.’
Goldman Sachs’ David Mericle
“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 midsize banks will prove sufficient,” David Mericle at Goldman Sachs wrote in a preview. “We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now.”
And at least one or two anticipated an outright rate cut in response to the upheaval,as the central bank waits to gauge the severity of the economic and financial fallout.
The bout of banking unrestis likely to weigh on the economy, meaning the central bank itself does not need to do as much to restrain economic growth. The Goldman economists estimate that the impact of the banking crisis could be equivalent to as much as half a percentage point of central bank interest rate increases.
Underlining how uncertain such forecasts are,though,Torsten Slok,the chief economist at Apollo,estimated that tightening lending standards and other fallout from the past week would be roughly equivalent to a more drastic 1.5 percentage point increase in the Fed’s main policy rate.
“In other words,over the past week,monetary conditions have tightened to a degree where the risks of a sharper slowdown in the economy have increased,” Slok wrote in an analysis over the weekend.
It is unclear how long any pullback in banks’ willingness to lend money will last,or if it will stabilise or worsen. Given the vast uncertainty,Diane Swonk,the chief economist at KPMG,said officials might scrap their economic projections altogether,as they did at the outset of the coronavirus pandemic.
Releasing them would “add more confusion than clarity,given that we just don’t know,” Swonk said.
Powell will hold a news conference on Wednesday[early Thursday AEDT] after the release of the Fed’s post-meeting statement,one that could be tense for a number of reasons:Powell will most likely face questions aboutwhat went wrong with the oversight of Silicon Valley Bank. The Fed was its primary regulator,and was aware of issues at the bank for more than a year before its crash.
And Powell will have to explain how officials are thinking about their policy path at a complicated juncture,when the Fed will have to weigh economic momentum against blowups in the banking sector.
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Hiring has stayed very strong in recent months:US employers added more than 300,000 jobs in February,after more than half a million in January. Officials had expected hiring to slow substantially after a year when rapid interest rate increases pushed borrowing costs to above 4.5 per cent in February,from near zero last March,the fastest pace of adjustment since the 1980s.
Inflation,too,has showed unexpected stickiness. While the consumer price index has been slowing on an annual basis for months,it remained unusually rapid at 6 per cent in February. And a closely watched monthly consumer price measure that strips out food and fuel,the prices of which bounce around,picked back up.
Economists at Barclays suggested that the incoming data would probably have prodded the Fed to opt for a larger half-point rate increase,all else equal. But given the continuing bank problems — and the fact that Silicon Valley Bank’s distress was partly tied to higher interest rates — they expected the Fed to move by a quarter-point at this meeting to avoid further unsettling banks.
“The link between the rising funds rate and risks of further bank distress presents a clear tension for the FOMC,” economist Marc Giannoni and his colleagues wrote,referring to the Fed’s policy-setting Federal Open Market Committee. “Risk management considerations will warrant a less aggressive policy hike in March.”
The economists noted that if the situation in the US banking system were not so closely tied to rising rates,Fed officials would most likely prefer to separate financial stability concerns from their fight against inflation.
“At this point in time,for the Fed,a pregnant pause is warranted,” Swonk said. “It’s a marathon,not a sprint — hold back now,promise to do more later if needed.”
This article originally appeared in The New York Times