The Fed will consider a pause as fallout from SVB Roils Markets
(Bloomberg) — Federal Reserve officials face their biggest challenge in months as they consider whether to continue raising interest rates this week to cool inflation, or pause amid market turmoil fueled by recent bank failures.
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Before the collapse of Silicon Valley Bank and the resulting fallout, Fed policymakers were poised to raise interest rates by as much as 50 basis points after a slew of data suggested the economy was much stronger than officials thought at the start of the year.
Now, given financial market volatility, many Fed watchers expect a smaller quarter-point increase, and some say the U.S. central bank will take a break altogether after a two-day meeting starting on Tuesday.
The decision follows an interest rate increase of 50 basis points from the European Central Bank on Thursday. President Christine Lagarde said the ECB remains committed to fighting inflation, while closely monitoring banking tensions.
Also highly anticipated from the Fed meeting is an update to the summary of economic projections ̵[ads1]1; a quarterly report that lays out participants’ forecasts for everything from inflation to interest rates – and Chairman Jerome Powell’s post-meeting press conference.
Amid the banking sector’s turmoil, Powell is likely to face questions about the central bank’s supervision of SVB and other struggling entities.
He must also tread carefully when talking about the likely future path of interest rates. Before the banking problems emerged, Fed officials had indicated that interest rates would have to move above 5% this year and remain there until inflation was about to fall back to its 2% target.
But increased uncertainty about the extent to which problems with bank capitalization — exacerbated by the Fed’s rapid rate hikes and the impact on Treasury yields — will affect the broader economy could limit Powell’s ability to tighten much more going forward.
What Bloomberg Economics Says…
“The FOMC faces its most challenging policy decision in recent memory on March 22. Market expectations have shifted sharply – from a 50 basis point hike to a pause – as fears of bank contagion crowd out inflation concerns. We expect the Fed to hike 25 basis points, taking the upper bound from 4.75% to 5%. Accelerating inflation maintains the pressure to keep going.”
— Anna Wong, Chief Economist in the United States. For full analysis, click here
Elsewhere, more than a dozen other central banks are setting policy in the coming week. Economists predict interest rate increases in the UK, Switzerland, Norway, Nigeria and the Philippines, while Brazil and Turkey are likely to hold. Meanwhile, traders betting on the Bank of Canada’s rate path will get another inflation reading.
Click here for what happened last week, and below is an overview of what’s happening in the global economy.
On Monday, the People’s Bank of China is likely to report that banks left their prime rates unchanged as the economy gradually recovers.
In Tokyo, a summary of opinions from the Bank of Japan’s meeting earlier this month will shed more light on the rationale for keeping monetary policy steady ahead of Kazuo Ueda’s arrival at the helm in April.
Officials at the Reserve Bank of Australia, Chris Kent, can on Monday give an updated view of the policy stance and any concerns about contagion in the financial market. These remarks are likely to prove more timely than the minutes due on Tuesday from the RBA’s March meeting.
Early trade figures from South Korea will provide a pulse check on global conditions.
Japan’s inflation figures on Friday are set to mirror earlier data that pointed to a cooling in prices, largely helped by recently subsidized electricity bills.
The central banks of Hong Kong and Taiwan will announce their interest rates on Thursday.
Europe, Middle East, Africa
The Fed may be the dominant central bank decision this week, but several others will also draw investors’ attention.
The Bank of England is central to Europe. Officials are awaiting the latest UK inflation reading on Wednesday, possibly showing that price growth is still close to double digits. Most economists predict interest rates will be raised by a quarter of a point next day, but with economic tensions still simmering, a minority see no change.
Here’s a quick overview of the other decisions:
The Swiss National Bank meeting on Thursday is a quarterly one and it is catching up, so a rise of as much as 50 basis points is widely expected. Credit Suisse Group AG overshadows the result, the stricken bank offered a lifeline to help limit global turmoil.
The same day in Norway, where officials are predicted to raise interest rates by another quarter of a point to extend the monetary policy tightening cycle in the oil-rich economy.
An Icelandic decision is due on Wednesday, with another big rate hike possible.
Looking south, the central banks will also be very active. Here’s a quick summary:
Nigeria may raise interest rates on Tuesday to curb inflation near 18-year highs and to encourage investment.
In Angola on the same day, officials may cut benchmark borrowing costs for the second time this year as the kwanza remains stable, commodity prices moderate and a downward swing in inflation looks set to continue.
In Morocco on that day, the central bank will most likely stop monetary tightening as food prices begin to ease.
And in Turkey on Thursday, officials are expected to keep interest rates steady. Any sign of future policy will be key as the country heads towards elections in May, where President Recep Tayyip Erdogan faces the strongest challenge to his two decades in power.
After the ECB’s meeting on Thursday, which ended with a pint rise but no future guidance, more than a dozen of its policymakers will speak in the coming days. President Lagarde is likely to draw the most attention with testimony to the European Parliament on Monday.
Further clues about the backdrop for the banking system may be available when her ECB counterpart Andrea Enria, the eurozone’s top regulator, speaks to the same panel of lawmakers the following day.
Lagarde is also among officials who will take the stage at the ECB and Its Watchers conference in Frankfurt on Wednesday, with several others scheduled to appear elsewhere during the week.
Meanwhile, purchasing managers’ indices in the eurozone and the UK will give an indication of industry strength as China reopens, and the German Council of Economic Experts will publish updated growth prospects.
A busy week in Brazil begins with the central bank’s survey of market expectations for inflation, which continues to ease further above target through 2025.
Banco Central do Brasil is all but certain to keep its key rate at 13.75% for a fifth consecutive meeting, although policymakers may strike a dovish tone in their post-decision statement.
After minimal disinflation in the past three mid-month CPI readings, analysts see a steeper slowdown in printing in mid-February and into the second quarter due to base effects, before a pick-up in the second half of the year.
Chile’s fourth-quarter manufacturing report may show the Andean country narrowly avoided falling into a technical recession, partly due to untapped household liquidity and the impact of China’s reopening.
In Argentina, four straight negative readings on the monthly economic activity indicator point to a quarterly decline in output heading into a challenging 2023.
In Mexico, the weakness in retail sales since May is likely to extend into January, while falling demand from the US, the country’s biggest export market, is expected to weigh on January GDP proxy data.
The early consensus has mid-month inflation nearing a one-year low – but still more than double the 3% target – while the somewhat stickier core reading is stretching from November’s two-decade high of 8.66%, in line with Banxico forecasts.
–With assistance from Robert Jameson, Malcolm Scott, Sylvia Westall and Stephen Wicary.
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