The next Federal Open Market Committee (FOMC) meeting is scheduled to be held on March 21 and 22. According to reports, the US Fed will announce its decision to raise interest rates, which will be followed by a press conference on March 22 at 2:00 p.m. (ET).
The FOMC will discuss and make decisions for these two days over a variety of economic measures, including an increase in the interest rate and to help rein in US inflation.
Investors and economists should pay close attention to rate rise choices at the meeting in addition to the publishing of the Summary of Economic Projections by the Fed. It will shed light on the expectations of policymakers for interest rates and the US economy for the rest of 2023 and beyond.
Fed officials will have to decide whether to focus on fighting inflation by hiking rates as expected during the meeting or to disregard the recent failures of Silicon Valley Bank and Signature Bank and concerns about a Swiss Bank and maintain rates to give the financial system time to stabilize.
The US Federal Reserve increased interest rates on January 31 and February 1 by one-quarter of a percentage point, putting the Fed funds rate in a range of 4.50% to 4.75%.
The US Federal Reserve previously raised interest rates by 75 basis points four times in a row, followed by a 50 basis point increase in December and a 0.25% increase in January.
The market had previously expected that the Fed would raise interest rates by 25 basis points at its FOMC meeting on March 21st and 22nd.
But Jerome Powell’s (Fed Chair) earlier testimony to Congress, in which he sounded harsh, gave the market signal of a 50 basis point increase. After learning about the banking crisis, expectations of a greater rate increase faded.
While some industry experts anticipate a Fed pause, others anticipate a rate increase of 50 basis points. The Fed may decide to proceed cautiously by increasing the rate by 25 basis points. On March 22, the US Fed will discuss how it views the ongoing financial crisis and inflationary pressure in the economy.
The FOMC meeting in March is an effort to address the concerns about the collapse of the banking sector. The probability that the Fed will raise interest rates by 25 basis points on Wednesday is currently somewhat greater than the probability that it will leave them unchanged.
The release of the February core PCE price index, the Fed’s preferred measure of inflation, on March 31 will give the FOMC some time to process the effects of the SVB’s influence on the banking industry and collect further inflation data.
On Friday, SVB formally filed for bankruptcy. Banks are increasing their deposit rates in the SVB downturn to more effectively compete with Treasury returns, which have turned out to be a superior alternative to keeping money in savings and checking accounts.
A tightening of loans has also begun as a measure to prevent inflation. These two actions should at least result in some Fed compression.
The government must work out how to restore depositors’ faith in the American banking system and reassure them that their money is safe from excessive or at least moral hazard.
When considering how to combat inflation while also dealing with the US bank collapse, Fed officials have two basic options, they can either ignore it and continue to raise rates while maintaining their attention on price stability, even if there is a chance that this will worsen the existing friction in the banking industry.
Or they can wait for the time being to allow the financial system to stabilize, even if it means maintaining strong price pressures. Without financial stability, the Fed cannot wage its fight on inflation, which is frequently referred to as its third mandate.
Investors are still in confusion about what to expect. According to CME Group, market participants last week saw a chance of about 80% for a March quarter-point increase. But on the next day, those possibilities had dropped to about 48%, with the likelihood of no moment being observed at almost 52%.
Even now, economists are unsure of what the Fed will do. Goldman Sachs stated that it no longer expects the Fed to raise interest rates at its meeting in March. Meanwhile, Moody’s analytics announced last week that it expects the Fed to hold off on raising interest rates in March before doing so by a quarter point in May and June.
A pause in March doesn’t always mean the Fed is finished. According to experts, it may only be intended to allow markets and the banking industry some breathing space before picking back up in May.
In addition to setting interest rates, the Fed will also update its forecast for the American economy and interest rates through 2025.