© Reuters. Washington, EUA
18/03/2008
REUTERS/Jason Reed
By Lindsay Dunsmuir and Ann Saphir
(Reuters) – With just six days to go before Federal Reserve officials meet in Washington, what decision they will make on interest rates now and in the coming months is in doubt as investors and Wall Street economists try to guess what the central bank will do next. -American will do.
Over the past year, the Fed’s leadership has gone out of its way to signal its intentions to raise interest rates to curb high inflation, relying on a steady stream of economic data releases to guide its actions.
But now Fed Chair Jerome Powell and his colleagues must respond in real time to the turmoil in the banking system after the collapse of two major US regional banks and Swiss regulators having to promise assistance to the Swiss credit (SIX:), developments that are reshaping domestic and international financial conditions on a daily, if not hourly basis.
And it’s all unfolding during the policymakers’ quiet period ahead of the Fed meeting, which prevents members from publicly offering clarity about their assessment of the situation and its effect on monetary policy decisions.
It was only last week that Powell signaled the central bank might step up its rate-raising campaign in the face of persistent inflation. Traders began pricing in a 0.5 percentage point rise in interest rates at the Fed’s March 21-22 meeting, from its current range of 4.5% to 4.75%, and higher beyond that.
Traders now see next week as a dilemma between a 25 percentage point rise and a break, with rate cuts seen as likely in the coming months as the turmoil at Credit Suisse has renewed fears of a banking crisis that could paralyze the US economy.
Analysts also sought to make sense of sudden events, including the failure of Silicon Valley Bank on Friday, the Fed’s creation over the weekend of an emergency bailout for the banking sector, new data showing slow progress in the fight against inflation and a drop in bank stocks on Wednesday.
“I think they’re really up 25 basis points next week,” said Jefferies’ Thomas Simmons. “They need to keep fighting inflation to maintain credibility, and a break here at these levels is not going to stop the bleeding in the markets.”
Former Boston Fed President Eric Rosengren takes a different view.
“Financial crises create demand destruction,” Rosengren said on Twitter. “Banks reduce the availability of credit, consumers postpone big purchases, businesses postpone spending. Interest rates must stop until the degree of demand destruction can be assessed.”
At bottom, the uncertainty about the Fed’s next move boils down to the difficulty of knowing how quickly and how deeply the current turmoil in the banking sector will spill over into the real economy.
After all, the Fed’s rate hikes are designed to slow the economy, and for months some officials have been expressing bafflement over why, after such an aggressive monetary tightening, there was so little of it to see beyond the hard-hit housing sector.
Next week, the Fed will publish new forecasts for the future path of the US benchmark rate. In December, officials predicted it would reach 5.1%, and last week traders expected it to rise above 5.5%.
Now, a further hike or no hike is expected by the Fed, and then a series of cuts that would leave the rate below 4% by the end of the year.