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The Fed is expected to raise interest rates another 0.25% at the risk of deepening the banking crisis


The possible increase, which may be announced this Wednesday, would raise benchmark rates from 4.75% to 5% in an attempt to contain inflation. But there are fears that the measure will put more pressure on financial institutions and limit lending even more.

By Patti Domm -


The Federal Reserve is expected to raise interest rates again this Wednesday, this time by a quarter of a percentage point (0.25%), while the financial body faces the difficult task of assuring the markets that this measure will not aggravate the current crisis. banking.

Most economists expect the Fed to raise benchmark interest rates from 4.75% to 5% on Wednesday afternoon, though some believe the central bank may hold off on raising it again due to concerns about the banking system.

The central bank is contemplating using interest rates as a tool as it seeks to calm markets and stem a more serious banking crisis.


the fear is that raising rates will put more pressure on financial institutions and limit lending even further

, hurting small businesses and other borrowers.

Federal regulators stepped up to insure deposits at Silicon Valley Bank and Signature Bank and provided more favorable loans to banks for periods of up to a year.

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The Fed joined other global central banks on Sunday to boost liquidity through the dollar swap system after UBS bank decided to buy struggling Credit Suisse bank.

Investors are waiting for assurances from Fed Chairman Jerome Powell that the central bank can indeed contain the bank's problems.

"We want to know that these are [problems] with a few banks and not a more bank-wide problem," said Michael Gapen, Bank of America's US economic chief.

"Right now, the market needs to know that you understand the problem and are willing and able to do something."

A month of financial storm

Markets have come under pressure in the past month, first from a Fed sounding emboldened by its rate hikes and then from fears of knock-on damage to the banking system.

Fed members began their two-day meeting on Tuesday.

The event kicked off two weeks after Powell warned a congressional committee that the Fed may be forced to raise interest rates much more than expected to combat inflation.

Those comments triggered interest.

A few days later, the surprise collapse of Silicon Valley Bank stunned markets, slashing bond yields.

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Forecasts for how much the Fed can raise interest rates again have changed in recent days: what was expected to be half a point two weeks ago could now be a quarter point or even zero.

Markets were calm on Monday and Tuesday

, with stocks rising and Treasury yields pointing higher.

This comes after investment bank UBS's decision to buy investment bank Credit Suisse for $3.25 billion calmed down the global banking system.

But concerns about the US regional bank First Republic remain.

That institution received 30,000 million dollars from a consortium of banks last week.

David Faber, from CNBC, reported that JPMorgan is working so that banks find alternatives, such as acquisition or sale of capital.

First Republic shares fell 47% on Monday but rose along with those of other regional banks on Tuesday after Treasury Secretary Janet Yellen said the government could support deposits at other institutions if necessary.

the message is key

Gapen expects Powell to explain that the Fed is fighting inflation by raising interest rates, but also to reassure markets that the central bank can use other tools to preserve financial stability.

"From now on, things are going to be done on a meeting basis. Everything will depend on the data," Gaspen said.

"We have to see how the economy plays out [...], how the financial markets behave, how the economy responds."

The Fed is expected to release its rate decision, along with its economic projections, around 2:00 pm ET.

Powell will speak at 2:30 p.m.

Jimmy Chang, chief investment officer at the Rockefeller Global Family Office, said he expects the Fed to raise interest rates by a quarter point to instill confidence, and then signal no further hikes for now.

A First Republic Bank branch in New York, United States, on March 10, 2023.Getty Images

"I wouldn't be surprised if they do go higher because historically when the Fed stops raising, and goes into pause mode, the stock market's initial reaction is to rally."

He expanded that the Fed was unlikely to pause raising, but his message could be interpreted that way.

"Now, at the very least, they want to maintain this state of stability or confidence," Chang explained.

"I don't think they'll do anything that could potentially rile the markets [...] Depending on [their projections], I think the markets will think it's the latest [interest rate] hike."

A likely pause in rate hikes

Diane Swonk, chief economics officer at accounting firm KPMG, said she expects the Fed to pause rate hikes due to economic uncertainty, and the fact that contraction in bank lending would amount to a tightening of policy. fed policy.

Swonk commented that he does not expect any guidance on future hikes at this time and that Powell can underscore that the Fed is closely monitoring developments and economic data.

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"I don't think he can compromise on anything. I think he has to keep all options on the table and say that he will do what is necessary to promote financial and price stability," he said.

"We have somewhat permanent inflation. There are signs that the economy is weakening."

Swonk also predicts that it will be difficult for the Fed to present its economic forecast for the quarter because the problems that the banks are facing have created a lot of uncertainty.

As it did during the COVID-19 pandemic in March 2020, the Fed could temporarily suspend its projections, he noted.

Source: telemundo

All news articles on 2023-03-22

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