US Federal Reserve to balance banking woes, inflation in next interest rate decision
FROM 50 BASIS POINTS TO ZERO
SVB’s dramatic implosion this month was the largest banking failure since the 2008 financial crisis.
The failure of the California high-tech lender on Mar 10, and the collapse of New York’s Signature Bank a few days later, sparked a rout in regional banking stocks and led many analysts to conclude that the Fed will abandon an anticipated increase in the pace of hikes.
Powell told senators earlier this month that it may be necessary to increase the benchmark lending rate to tame the “widespread” inflationary pressures keeping price rises elevated above the bank’s long-run target of 2 per cent.
Futures traders responded by pricing in a 50-basis point rise, according to CME Group.
But the financial stress brought to light by SVB’s failure caused a dramatic turnaround in expectations.
The strains in the financial sector will likely have weakened the Fed’s resolve to move more aggressively on Mar 21 and 22, Bank of America US economist Michael Gapen said on Friday.
“We think recent events have changed the debate,” he wrote in a note to clients. “We think the debate is now between a 25 (basis points) rate hike in March, or none at all.”
COOLER DATA EMERGES
Data for February shows that some corners of the American economy are now beginning to contract – which eases pressure on the Fed – while the consumer price index measure of inflation slowed slightly to an annual rate of 6 per cent.
US retail sales and wholesale prices slipped last month, providing some respite for the Federal Open Market Committee to consider when it mulls another interest-rate hike.
But the Fed’s favoured measure of inflation showed an annual increase in January, suggesting there is still a long way to go before price rises are brought back under control.
Turmoil in the banking sector is not over either, with many regional banks seeing their stocks plunge again at the end of the week despite intervention by US regulators and some of Wall Street’s biggest banks.
“At a minimum, stress in financial markets suggests the Fed should proceed with caution,” Bank of America’s Gapen said.