Fed weighs new challenges after SVB crash as rate hike decision looms

“Now this combination of still very high inflation on the one hand, and at the same time emerging financial stability issues on the other, makes an already difficult job even more difficult,” said Antulio Bomfim, head of global macro at the global group fixed income asset management company Northern Trust Asset Management.

Prior to joining Northern Trust in October, Mr. Bomphim held senior positions at the Fed, including as Special Advisor to Chairman Jerome H. Powell and Special Advisor to the Fed’s Board of Governors.

The committee “will look at market imbalances, but they don’t want investors to think that this will somehow distract them from the only problem they had just over a week ago, which was too high inflation. added Mr. Bomphim.

On Wednesday, the Fed will announce whether it will raise rates for the ninth consecutive meeting. The federal funds rate currently ranges from 4.5% to 4.75% and was last raised by 25 basis points in February. The move follows a 50 basis point increase in December and four 75 basis point increases at each of the previous four committee meetings.

But with the collapse of Silicon Valley Bank and other unrest in the banking sector earlier this month, the Fed may reverse its planned rate hike, Mr. Bomphim said.

“For me in the near future, maybe they will slow down the pace,” he said. “If they were thinking about 50 basis points, maybe they would go to 25 basis points. If they paused, which is unlikely, it would be accompanied by rather explicit language saying that it was a pause while they thought.” are assessing the developing imbalances in the market, but they remain extremely concerned about inflation.”

According to Mr. Bomphim, the last thing the Fed wants after its announcement is for the market to understand that the central bank is shirking its focus on inflation. “High inflation for them really poses a threat to their credibility as an institution,” he added.

According to the CME FedWatch Tool, which tracks trading in 30-day federal funds futures, traders as of Monday afternoon were estimating a 74.5% chance of a 25 basis point increase at this week’s Fed meeting and a 25.5% chance of no increase rates.

Prior to the SVB crash, and after Mr. Powell testified before Congress on March 7 and 8, traders thought there was a 77.1% chance of a 50 basis point upswing in this week’s meeting.

Mr. Powell has repeatedly said that the Fed will continue to raise rates until inflation is curbed. “Restoring price stability is essential to laying the groundwork for achieving maximum employment and stable prices over the long term,” he told the Senate Banking Committee. March 7th. “Historical data strongly warn against premature policy easing. We will stay the course until the job is done.”

Investors should take Mr. Powell at his word, Mr. Bomphim said. “To think that, for example, they are going to abandon their aggressive stance on inflation in order to now moderate inflation while they solve the problem (stress in the banking sector), I think that would be an unreasonable position. to have such thoughts,” he said.