Fed considers pause as consequences for SVB Roils Markets

(Bloomberg) — Federal Reserve officials are facing their biggest challenge in recent months as they decide whether to keep raising interest rates this week to bring down inflation, or pause amid market turmoil caused by recent bank failures.

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Prior to the collapse of Silicon Valley Bank and the resulting policy fallout, the Fed was poised to raise rates by as much as 50 basis points after a series of data showed the economy was much stronger than officials thought at the beginning of the year.

Now, given the financial market volatility, many Fed watchers are expecting a smaller quarter-point gain, with some saying the US central bank will pause altogether after a two-day meeting starting Tuesday.

The decision follows a 50 basis point rate hike by the European Central Bank on Thursday. President Christine Lagarde said the ECB remains committed to fighting inflation by closely monitoring banking tensions.

The Fed meeting is also expected to update the Economic Forecasts Summary — a quarterly report outlining participants’ forecasts for everything from inflation to interest rates — and Chairman Jerome Powell’s post-meeting press conference.

Amid banking turmoil, Powell is likely to face issues related to central bank oversight of SVBs and other struggling institutions.

He will also need to tread carefully on the likely future path of interest rates. Before banking troubles arose, Fed officials indicated that rates should rise above 5% this year and stay there until inflation falls to their 2% target.

However, heightened uncertainty about the extent to which bank capitalization problems, exacerbated by the Fed’s rapid interest rate hike and impact on Treasury yields, will impact the broader economy could limit Powell’s ability to tighten policy going forward.

What Bloomberg Economics says…

“The FOMC will make its most difficult policy decision in recent memory on March 22. Market expectations have changed sharply – from a 50 basis point rise to a lull – as fears of banking contagion crowd out fears of inflation. We expect the Fed to raise rates by 25 basis points, raising the upper limit from 4.75% to 5%. The re-acceleration of inflation forces us to continue hiking.”

— Anna Wong, Chief US Economist. For a complete analysis click here

Elsewhere, more than a dozen other central banks will set policy in the coming week. Economists are forecasting rate hikes in the UK, Switzerland, Norway, Nigeria and the Philippines, while Brazil and Turkey are likely to remain. Meanwhile, traders betting on the change in the interest rate of the Bank of Canada will receive new data on inflation.

Click here to read about what happened last week, and below we will tell you what is happening in the global economy.

Asia

On Monday, the People’s Bank of China is likely to report that banks have left their main lending rates unchanged as the economy gradually recovers.

In Tokyo, a summary of opinions at the Bank of Japan meeting earlier this month will shed more light on the rationale for keeping monetary policy unchanged ahead of Kazuo Ueda’s accession to power in April.

Reserve Bank of Australia spokesman Chris Kent on Monday could offer an update on policy and any concerns about financial market contagion. These remarks are likely to be more timely than Tuesday’s minutes from the RBA’s March meeting.

Early trade data from South Korea will offer a pulse check on global conditions.

Japan’s inflation data on Friday should reflect earlier data that indicated a cooling in prices, helped in large part 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’s decision may be the dominant central bank decision this week, but some other decisions will also draw investors’ attention.

The Bank of England is central to Europe. Officials are waiting for the latest UK inflation data on Wednesday, which may indicate that price increases are still close to double digits. Most economists predict that rates will be raised by a quarter of a point the next day, although with financial tensions still lingering, a minority see no change.

Here is a summary of other solutions:

  • Thursday’s Swiss National Bank meeting is quarterly and needs to be made up for, so an increase of as much as 50 basis points is expected. Overshadowing the result is Credit Suisse Group AG, the stricken bank that offered a lifeline to help contain global unrest.

  • The same day in Norway, where officials are expected to raise rates by another quarter of a point to prolong the cycle of monetary tightening in the oil-rich economy.

  • The Icelandic decision is due on Wednesday and another significant rate hike is possible.

Looking south, central banks will also be very active. Here’s a quick overview:

  • Nigeria may raise rates on Tuesday to curb inflation, which has reached a nearly 18-year high, and spur investment.

  • In Angola on the same day, officials may cut underlying borrowing costs for the second time this year as the kwanzaa remains firm, commodity prices decline and price increases are likely to decline further.

  • In Morocco, the central bank is likely to halt its monetary tightening on that date as food prices begin to decline.

  • And in Turkey on Thursday, officials are expected to keep rates unchanged. Any signs of future policy will be key as the country heads towards elections in May, in which President Recep Tayyip Erdogan will face the biggest challenge in his 20-year term in office.

After Thursday’s ECB meeting, which ended up half a pint higher but with no outlook for the future, more than a dozen of its policymakers will speak in the coming days. President Lagarde is likely to attract the most attention with his speech in the European Parliament on Monday.

Further clues about the banking system may come when her ECB colleague Andrea Enria, the eurozone’s chief regulator, meets with the same group of lawmakers the next day.

Lagarde is also among the officials who will speak at a conference of the ECB and its observers in Frankfurt on Wednesday, with several more to speak elsewhere during the week.

Meanwhile, PMIs in the euro area and the UK will point to the strength of the industry as China reopens, and the German Council of Economic Experts will release an updated growth forecast.

Latin America

A busy week in Brazil begins with the central bank reviewing market expectations for inflation, which remains above its 2025 target.

Banco Central do Brasil will almost certainly keep its key rate at 13.75% for the fifth consecutive meeting, although politicians may be dovish in a statement after the decision.

After the lowest disinflation in the last three CPIs in the middle of the month, analysts are forecasting a sharper deceleration in mid-February and the second quarter due to base effects before picking up in the second half of the year.

Chile’s fourth-quarter results report may show the Andean nation narrowly avoided a technical recession, due in part to untapped household liquidity and the impact of China’s opening.

In Argentina, four consecutive negative monthly economic activity indicators point to a quarterly decline in output ahead of a challenging 2023.

In Mexico, the decline in retail sales seen since May is likely to extend into January, while falling demand in the US, the country’s largest export market, could put pressure on January GDP data.

Early consensus suggests mid-month inflation is approaching a yearly low, though still more than double the 3% target, while somewhat firmer underlying data show a decline from a November high of 8.66% for two decades, which is in line with the forecast. Banco Forecasts.

–With assistance from Robert Jameson, Malcolm Scott, Sylvia Westall and Stephen Vicary.

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