The Federal Reserve is meeting this week to decide its next move on interest rates just as its year-long fight against inflation is colliding with a crisis in the financial sector. The Fed’s next move will be closely watched as recent bank failures bring back memories of the 2008 financial crisis. Even ahead of Wednesday’s central bank policy decision, investors will be looking for more signs of stress in the banking sector. global and further action by regulators to provide relief. This is a special edition newsletter that we send to subscribers of five things And New Economy Daily to give an overview of what we are looking at before the meeting.
Investor sentiment abounds, with expectations shifting between another quarter-point Fed hike and a pause. The only certainty is that the Fed will refrain from a larger half-point hike that Chairman Jerome Powell had put on the table just before financial stability concerns emerged. A survey of economists by Bloomberg News shows a median call for a quarter-point hike that will take the Fed’s key rate to a range of 4.75% to 5% and the bond market attributes about 65% of chance at this possibility. At the height of banking tensions last week, traders cut the likelihood of a quarter-point hike to less than half while some banks, including Goldman Sachs and Barclays, changed their rate calls and did not expect more of a rate hike.
As developments move quickly, amid efforts to support struggling lenders from Credit Suisse to the First Republic, rate hike expectations could change further before Wednesday. The Fed is highly unlikely to challenge the markets with a surprise move after bond volatility hit its highest level since 2008. The widespread credit crunch and signs of liquidity strains will also be key concerns for policymakers. Last week, banks looking for cash already withdrew a record amount of funds from the The Fed’s emergency easing, including new financial support, eclipses a previous record set during the 2008 financial crisis.