Some economists expect Fed to keep interest rates unchanged amid the Silicon Valley Bank crisis.

Despite a resilient economy, the Federal Reserve has been aggressively hiking interest rates to tame inflation. However, the collapse of Silicon Valley Bank (SVB) and broader risks to the financial system may lead the Fed to pause its quarter-point interest rate hikes next week.

Market analysts had previously predicted a half-point rate increase following Fed Chair Jerome Powell’s Congressional testimony and a strong employment report. Still, the collapse of SVB has made some experts reconsider their assessment.

Why the Fed might pause rate hikes

While inflation remains a concern for the Federal Reserve, the collapse of SVB and wider financial uncertainty has forced experts to reassess their view of the central bank’s monetary policy. As a result, some economists believe that given the recent stress in the banking system, the Fed will not deliver a rate hike at its March 22 meeting.

Goldman Sachs predicts quarter-point rate increases in May, June, and July, bringing the Fed’s key short-term rate to a range of 5.25% to 5.5%, a quarter point below its prior estimate. NatWest goes further, expecting the Fed to keep rates unchanged next week and believing it’s finished hiking rates for now.

Despite the funding made available to SVB and Signature Bank depositors by the Fed, the Treasury Department, and the Federal Deposit Insurance Corporation, many regional banks may still be reluctant to draw on those loans because of the stigma surrounding troubled banks. This could lead to more depositors withdrawing their money, ultimately causing regional banks to curtail lending and possibly become insolvent.

Related Facts

• While the collapse of SVB and the risks to the financial system have led some experts to predict a pause in the Fed’s interest rate hikes, others continue to predict a quarter-point rate increase next week.
• Even if the Fed pauses interest rate hikes in March, they will likely resume later in the year.
• The Fed has been aggressively hiking interest rates since last year, moving from a rate near zero to its current rate of 4.5% to 4.75%.

Key Takeaway

The collapse of SVB and wider financial uncertainty have led to speculation that the Fed will pause interest rate hikes next week. While the Fed has been aggressively raising interest rates over the past year, the collapse of SVB highlights the fragility of the financial system and the need for caution in monetary policy.

Conclusion

While concerns over inflation drive the Fed’s actions, the collapse of SVB and concerns about the financial system’s stability have made some experts reassess the central bank’s monetary policy. It remains to be seen whether the Fed will pause rate hikes next week or continue its aggressive monetary policy. Still, the collapse of SVB has highlighted the risks facing the financial system and the need for caution in monetary policy.