Federal Reserve ‘Between a Rock and a Hard Place’ as Interest Rate Decision Looms

The Federal Reserve is set to convene for one of its most uncertain policy meetings in years—the central bank balances a banking crisis with higher than target inflation rates. As a result, the Fed is expected to raise interest rates by 0.25% in its latest policy decision at 2:00 p.m. ET Wednesday afternoon, bringing the benchmark interest rate range to 4.75%-5%, the highest since October 2007. Fed Chair Jerome Powell will explain the Fed’s decision in a press conference at 2:30 p.m. ET.

The Challenges at Hand

The Fed has found itself caught “between a rock and a hard place,” says Wilmington Trust’s bond portfolio manager, Wilmer Stith. The banking crisis has left the Federal Reserve an uncomfortable position, requires them to act on several fronts simultaneously.

In March, Fed Chair Jerome Powell spoke of the likelihood of increased interest rates due to strong economic data. However, in the days that followed the speech, the Silicon Valley Bank, the 16th largest bank in the U.S., failed. This marked the second-largest banking failure in the country’s history. By March 12, the Fed, Treasury, and FDIC had stepped into backstop deposits for Silicon Valley Bank and in effect, deposits across the banking system.

Regulators also seized Signature Bank on March 12, and last week the banking industry launched a de facto bailout of troubled lender First Republic. As of Saturday, shares of First Republic had hit an all-time low. Over the weekend, UBS and Credit Suisse merged in an emergency combination expected to shore up the European banking system licensure stated global swap lines to ensure abundant worldwide dollar liquidity remained.

‘Further Hikes to Come’

Despite the crises, the data from the CME Group on Tuesday morning shows an 85 percent chance of a 25-basis-point rate hike. Stith warns that if the Fed stops and reverses rate hikes, markets may believe the Fed is not effectively curbing inflation. This could lead to rising mortgage rates, higher corporate funding costs, and an even tighter grip on the economy.

The Fed will also release its new Summary of Economic Projections (SEP) on Wednesday, including officials’ forecasts for interest rates, inflation, unemployment, and economic growth over the next two years, as well as expectations for the longer run.

Related Facts

• This is the seventh time the Federal Reserve has raised interest rates during this economic expansion.
• The banking industry organized a de facto bailout of troubled lender First Republic last week.
• Shares of First Republic have hit an all-time low amidst investor fears the bank will fail this month.
• The Fed stated global swap lines to ensure abundant worldwide dollar liquidity remained during the UBS and Credit Suisse merger.

Key Takeaway

The Fed must balance the consequences of a banking crisis with inflation rates that are higher than its target. The bank is expected to raise interest rates by 0.25% during its next policy meeting. The decisions made could have significant consequences for the economy and banking industry.

Conclusion

The Federal Reserve faces significant challenges as it balances a banking crisis with inflation rates above target. This puts the bank “between a rock and a hard place.” As the Fed convenes for one of its most uncertain policy meetings in years, economists watch to see the bank’s actions to tackle these complex, interconnected issues.