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The Federal Reserve’s hotly anticipated March 22 interest rate decision is just a week and a half away, and the drama that swept the banking and financial sector over the weekend is drastically shaking up expectations for what the central bank will deliver.
Before this weekend, investors believed there was a substantial chance that the Fed would make a half-point increase at its meeting next week. But investors and economists no longer see that as a likely possibility.
Three notable banks have failed in the past week alone as Fed interest rate increases ricochet through the technology sector and cryptocurrency markets and upend even usually staid bank business models. The tumult — and the risks that it exposed — could make the central bank more cautious as it pushes forward.
Investors have abruptly downgraded how many interest rate moves they expect this year. After Mr. Powell’s speech last week opened the door to a large rate change at the next meeting, investors had sharply marked up their 2023 forecasts, even penciling in a tiny chance that rates would rise above 6 percent this year. But after the wild weekend in finance, they see just a small move this month and expect the Fed to cut rates to just above 4.25 percent by the end of the year.
Economists at J.P. Morgan said the situation bolstered the case for a smaller, quarter-point move this month. Goldman Sachs economists no longer expect a rate move at all.
Other economists went even further: Nomura, saying it was unclear whether the government’s relief program was enough to stop problems in the banking sector, is now calling for a quarter-point rate cut at the coming meeting.
The Fed will receive fresh information on inflation on Tuesday, when the Consumer Price Index is released. That measure is likely to have climbed 6 percent over the year through February, economists in a Bloomberg forecast expected. That would be down slightly from 6.4 percent in a previous reading.
But economists expected prices to climb 0.4 percent from January after food and fuel prices, which jump around a lot, are stripped out. That pace would be quick enough to suggest that inflation pressures were still unusually stubborn — which would typically argue for a forceful Fed response.
The data could underline why this moment poses a major challenge for the Fed. The central bank is in charge of fostering stable inflation, which is why it has been raising interest rates to slow spending and business expansions, hoping to rein in growth and cool price increases.
But it is also charged with maintaining financial system stability, and higher interest rates can reveal weaknesses in the financial system — as the blowup of Silicon Valley Bank on Friday and the towering risks for the rest of the banking sector illustrated. That means those goals can come into conflict.
Some saw the Fed’s new lending program — which will allow banks that are suffering in the high-rate environment to temporarily move to the Fed a chunk of the risk they are facing from higher interest rates — as a sort of insurance policy that could allow the central bank to continue raising rates without causing further ruptures.
“The Fed has basically just written insurance on interest-rate risk for the whole banking system,” said Steven Kelly, senior research associate at Yale’s program on financial stability. “They’ve basically underwritten the banking system, and that gives them more room to tighten monetary policy.”
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Just glad to see rebound in the broader market. The week is still young.
... that headline needs more detail, because there are so many blowing up these days....
The latter is increasing, held down only by falling used vehicle prices. But the wholesale used vehicle prices are rising so it looks unlikely Super Core will drop much.
As my son and his fiancé just bought a house with a bid that needed an “ escalator clause”, it does not appear the housing market is cooling off much, at least in the MidWest. There are no longer dozens of bids, but not much in the way of declining prices. Too few houses for sale because nobody can afford a new mortgage
Next up, they'll be rolling out the 'CPI-ex-Inflation' data point to speak about the level of inflation....
"...Too few houses for sale because nobody can afford a new mortgage."
Yup. It's insane."American Dream?" WTF is THAT? A great many people are not as lucky as myself. I'm sitting pretty, without ever owning a house or Real Estate. In days gone by, it would be an asset gradually growing in value. These days, especially HERE, you buy a home at these current prices and it's an albatross around your neck. Even if you can afford it, the price per square foot is "beyond the beyond."
That one on Kaalawai Ave looks like just the ticket for me and my wife to escape New England winters. Can you run over and check it out for us?
Back up in Pittsfield and up by the VT line, they're still digging out. Tomorrow's St. Patrick's. Already. Beware the Ides of March. A day late.