WASHINGTON (AP) — The Federal Reserve is grappling with a murkier economic picture, clouded by turmoil in the banking sector and still high inflation, even as it meets to decide whether to keep raising interest rates or not. to declare a break.
The briefing is scheduled to begin at 2:30 p.m. ET. Watch the event live in the player above.
Most Fed watchers expect the central bank to announce a relatively modest quarter-point hike in its benchmark rate on Wednesday afternoon, its ninth increase since March last year. Still, for the first time in recent memory, there remains some uncertainty about what the Fed will announce when it releases its policy statement at 2 p.m. ET.
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The central bank will not just have to decide whether to extend its series of rate hikes for another year despite the nervousness in the financial sector. Fed policymakers will also try to peer into the future and predict the likely path for growth, jobs, inflation and their own interest rates.
These forecasts will be particularly difficult this time. In their most recent forecast in December, Fed officials predicted that they would raise their short-term rate to around 5.1% by the end of this year, about half a point above the level current. Some Fed watchers expect policymakers to raise that forecast to 5.3% on Wednesday.
But the upheaval in the banking sector has made expectations much less certain. The Fed meets less than two weeks after Silicon Valley Bank went bankrupt in the second largest banking collapse in American history. This shock was followed by the bankruptcy of another major bank, Signature Bank. A third, First Republic Bank, was saved from collapse by a $30 billion cash injection.
Given the increased uncertainties hanging over the financial system, there is little chance that the Fed will decide not to publish its usual quarterly projections. Three years ago, when the pandemic hit, the Fed moved a scheduled policy meeting to a Sunday, rather than Tuesday and Wednesday, to urgently address economic concerns caused by new pandemic restrictions. After this meeting, the Fed did not release any quarterly projections.
At the time, Powell said that releasing economic and interest rate forecasts, when the consequences of the COVID-19 pandemic were so unclear, “could have been more of a barrier to clear communication than a help”. Yet the unusual move then was as much a reflection of the chaos of the first pandemic as it was of uncertain prospects.
If the Fed raises its key rate by a quarter point on Wednesday, it will reach around 4.9%, the highest in nearly 16 years. Earlier this month, Powell said in congressional testimony that a half-point increase would be possible at this week’s meeting. The banking crisis suddenly upset these perspectives.
It will be a tough call for the 11 Fed officials who will vote on the rate decision. With hiring still strong, consumers continue to spend and inflation still higha rate hike would normally be a straightforward decision.
Not this time. The Fed should treat inflation and financial turmoil as two separate issues, to be managed simultaneously with separate tools: higher rates to fight inflation and increased Fed lending to banks to ease financial turmoil.
To complicate matters, it will be difficult to determine the impact on the economy of the collapse of Silicon Valley and Signature. The Fed, the Federal Deposit Insurance Corp. and the Treasury Department have agreed to insure all deposits at these banks, including those over the $250,000 limit. The Fed also created a new lending program to ensure banks can access cash to repay depositors, if needed.
But economists warn that many medium and small banks, in order to conserve capital, are likely to become more cautious in their lending. Tighter bank credit could, in turn, reduce business spending on new software, equipment and buildings. It could also make it harder for consumers to get car or other loans.
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Some economists fear that such a slowdown in lending may be enough to tip the economy into recession. Wall Street traders are betting that a weaker economy will force the Fed to start cutting rates this summer. Futures markets have forecast declines of three-quarters of a point by the end of the year.
The Fed would likely welcome a slowdown in growth, which would help calm inflation. But few economists know what the effects of a decline in bank lending would be.
Other major central banks are also seeking to rein in high inflation without worsening the financial instability caused by the two US bank failures and a hasty sale of struggling Swiss bank Credit Suisse to rival UBS.
Even with concerns surrounding the global banking system, the Bank of England faces pressure to approve an 11th straight rate hike on Thursday as annual inflation hit 10.4%.
And the European Central Bank, saying the European banking sector was resilient, last week raised its benchmark rate by half a point to fight against inflation of 8.5%. At the same time, ECB President Christine Lagarde took an open stance on further increases. In light of the uncertainties, she said, “we are not committing to further hikes and we are not done raising rates.”
In the United States, the most recent data still points to a strong economy and rampant hiring. Employers added 311,000 jobs in February, the government announced earlier this month. And while the jobless rate rose from 3.4% to a still-low 3.6%, it mostly reflects an influx of new job seekers who weren’t immediately hired.
Consumer spending was robust in January, fueled in part by a large cost-of-living adjustment for 70 million recipients of Social Security and other benefits. The Federal Reserve Bank of Atlanta predicts the economy will have grown at a healthy 3.2% annual rate in the first three months of this year.