The Fed is about to deliver a momentous policy decision. It'll be a choice between keeping the focus on inflation or stemming the banking chaos.
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Max Adams
Mar 22, 2023, 18:14 IST
Federal Reserve Board Chairman Jerome Powell.Sarah Silbiger/Getty Images
There is a crucial Fed decision looming today. It's the next big input for markets after weeks of turmoil that saw three US banks fail and a large European bank taken over in an emergency deal brokered by the government and regulators. All that while inflation is hovering at 6% on an annual basis here at home.
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So, Powell and his colleagues have had a lot to digest, to say the least. Some of the earliest knee jerking has calmed markets and the most apocalyptic reactions have faded, as predictions of calamity become more sober estimations of "a bit more pain ahead, maybe."
Still, today's announcement from Powell will be key, not just for gauging the path of interest rates, but for shedding some light on how the central bank is thinking about the biggest banking crisis since 2008.
This post first appeared in 10 Things Before the Opening Bell, a newsletter by Insider that brings you the inside scoop on what traders are talking about — delivered daily to your inbox. Sign up here. Download Insider's app here.
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1. What a difference a few weeks makes. Since the February 1 decision from the Fed to raise rates by 25 basis points, markets have been wracked by spasms of volatility, not from rate shocks this time, but from a spate of bank failures reminiscent of the last financial crisis.
If you think you've had a hard time dealing with the barrage of headlines, imagine how central bankers have been feeling. The initial reaction was that surely all of this means the Fed pauses rate hikes to avoid exacerbating the crisis, and Goldman Sachs said right after Silicon Valley Bank fell that markets should expect the Fed to hang tight this month.
A week or so later though and markets are thinking the odds are fairly locked for a definite increase of 25 basis points today, splitting the difference between those who say the Fed needs to back off and others who think 50 basis points would be the right move given where inflation is at. The CME FedWatch Tool on Tuesday afternoon was showing about an 85% chance the fed funds rate will be raised to quarter point to a target range of 4.50%-4.75%.
The Fed's inflation fight will still be top of mind today most likely. At 6%, inflation in February remained uncomfortably high. Powell and the Fed may acknowledge that monetary policy has caused some pain, and even add that more may be coming. But drama at a few mid-sized banks probably won't distract them, especially after months of withering criticism that their late reaction to rising prices marked a grave policy error.
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Sure, investors are still scared. In its survey of fund managers, Bank of America said that most respondents now consider a systemic credit event to be a bigger risk to the stock market than high inflation. US authorities though appeared bent on doing whatever it takes to stem the crisis, evidenced by Tuesday morning's speech from Treasury Secretary Janet Yellen, who said more aid could be provided to backstop deposits if needed.
What's your prediction for today's Fed decision and what Powell might say about the recent banking tumult? Email madams@insider.com to share your thoughts with me.
In other news:
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2.The British pound jumped against the dollar Wednesday after new data showed a surprise flare-up in UK inflation last month. Traders have now locked in the probability of the Bank of England raising interest rates tomorrow. Read the full story.
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Curated by Max Adams in New York. Feedback or tips? Email madams@insider.com.
Edited by Jason Ma (jma@insider.com) in Los Angeles and Hallam Bullock (@hallam_bullock) in London.
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