Will the Fed choose financial stability or cool down inflation? | Finance

Will the Fed choose financial stability or cool down inflation?  |  Finance
Federal Reserve Bank (Fed) headquarters in Washington, DC. (Photo: AFP/VNA)

As the US and European banking crises wreak havoc on the global economy, some executives are calling for U.S. Federal Reserve (Fed) pauses the monetary policy tightening route.

Investors predict there is a 60% chance that the Fed (ie the US central bank) will raise interest rates by 0.25 percentage points at the two-day policy meeting March 21-22, with the remaining 40% expected predicts this central bank will freeze key interest rates.

Several banking executives have called for the Fed to prioritize stabilizing financial markets first.

[Fed có khả năng nâng lãi suất thêm 0,25 điểm phần trăm vào tuần tới]

According to Peter Orszag, managing director of financial advice at investment bank Lazard, the Fed needs to quickly stabilize financial markets, while the policy of stabilizing inflation can be implemented gradually.

“The Fed should pause (at the next meeting) but be ready to raise rates gradually when the situation improves,” Orszag added.

The US Central Bank declined to comment on the matter.

Officials Fed may not make any statements about monetary policy or economic outlook ahead of the meeting.

Last year, the Fed raised interest rates at a rate not seen since the 1980s in an attempt to stave off inflation. Similar to the other side of the Atlantic Ocean, on March 16, the European Central Bank (ECB) announced an increase in interest rates by 0.5 percentage points.

Fast-rising interest rates after years of “cheap money” have rattled global markets and industries.

In the US, two banks have declared bankruptcy while many others are also under pressure. Meanwhile, Switzerland’s second largest bank Credit Suisse is trying to reach a rescue agreement.

The turmoil in the banking sector rattled markets, sending US government bond yields plummeting over the past week, with some investors complaining that large price swings have made trading a chore more difficult.

Bob Schwartz, senior fellow at economic consulting firm Oxford Economics, said that the bank’s problems will certainly attract the attention of policymakers. This is not a systemic problem but a liquidity problem, and the Fed can address it with its lending mechanisms.

James Tabacchi, general manager of brokerage South Street Securities, thinks the Fed should wait about a month for the market to stabilize.

He predicts the Fed will eventually raise rates above 6%. The current Fed rate is 4.5-4.75%.

According to Orszag, who served as director of the White House Office of Management and Budget (OMB) under the Obama administration, as long as expectations inflationary long-term is not affected as is the case now, the Fed still has time. Raising interest rates too quickly can cause serious damage, the most obvious example being the current banking crisis.

Many factors point to the pandemic’s lingering impact on inflation, such as supply chain disruptions and restrictions on travel and entertainment demand.

In a paper, Orszag and co-author Robin Brooks, chief economist at the Institute of International Finance, estimate that late effects related to delivery times could largely contribute to the Personal Consumption Index. core (PCE) – excluding volatile energy and foodstuffs – increased sharply in the fourth quarter of 2022. Disruptions will ease over time and help lower inflation this year.

Torsten Slok, chief economist at asset management firm Apollo Global Management, said that the recent turmoil in the banking sector has caused financial conditions to become tighter and raised the risk of a recession. serious economic.

BlackRock hedge fund strategists argue that the changes over the past week reflect the market’s reaction to the dangers posed by high interest rates. The price of the trade-off between fighting inflation and protecting economic activity-financial stability is now clear.

Still, some observers argue that a prolonged “freeze” of interest rates could risk a rebound in consumer prices. Recent US economic data shows that the inflation war is not over yet. Consumer prices in February 2023 increased 6% year-on-year, nearly three times the Fed’s target. /.

Mai Ly (VNA/Vietnam+)


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