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The FED's dilemma.

 

USD
The US Fed­eral Reserve must make one of the most con­sequen­tial decisions of its rate-rais­ing cam­paign this week as it con­siders whether to imple­ment another increase without know­ing if efforts to shore up the bank­ing sec­tor will work in the long term.

Cent­ral bank offi­cials were gath­er­ing yes­ter­day for their latest two-day meet­ing, at which they must decide whether to press ahead with another quarter­point rate rise or forgo an increase.
The dilemma comes after global author­it­ies acted swiftly to sup­port the fin­an­cial sys­tem fol­low­ing Sil­icon Val­ley Bank’s col­lapse, the Fed rolling out a new facil­ity to aid lenders and the Swiss gov­ern­ment broker­ing a hasty takeover of a fal­ter­ing Credit Suisse by UBS.
But it remains unclear whether these actions will be enough to stem the fal­lout from the crisis. «This whole thing is a dis­in­fla­tion­ary event . . . but it is very dif­fi­cult to know how dis­in­fla­tion­ary it is,» said Ian Shep­herd­son at Pan­theon Mac­roe­co­nom­ics, refer­ring to the bank­ing tur­moil.
Fuel­ling the uncer­tainty is the fact that regional banks are expec­ted to sharply cur­tail their lend­ing in response to the recent ruc­tions. Tor­sten Slok at Apollo Global Man­age­ment estim­ated banks hold­ing roughly 40 per cent of all assets across the sec­tor could retrench, lead­ing to a sharp reces­sion this year.
«What we do know is that the com­bin­a­tion of both the lagged effects of mon­et­ary policy slow­ing things down and now mag­ni­fy­ing that with this down­side risk is just mak­ing things more com­plic­ated,» he said. Most eco­nom­ists have since revised down expect­a­tions for the «dot plot», which aggreg­ates indi­vidual fore­casts for the fed funds rate through to 2025.
Before the implo­sion of SVB, many thought the median estim­ate for the socalled ter­minal rate would rise by half a per­cent­age point to between 5.5 per cent and 5.75 per cent. Now, some fore­cast that to remain unchanged while oth­ers expect only a quarter-point increase.
«The Fed has got some more to do,» said Vin­cent Rein­hart, who worked at the cent­ral bank for more than two dec­ades, though he said offi­cials were «less sure where they are headed».

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  1. Eric22 March 2023 at 11:58

    Let's see what they decide. Most people were under the impression they would press ahead with a rate rise. And I think that's what they will ultimately do. It may not be what they initially planned, maybe smaller.

    ReplyDelete

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