A Year After the First Interest Rate Hike, Fed’s Next Move in March is Less Certain

When the Federal Reserve launched its first interest rate hike in March 2022, it seemed like a no-brainer that we would see more hikes coming. But as with many things that seem like sure things, things haven’t gone according to plan.

With eight hikes since then, the ninth hike was expected to happen at the Fed’s next policy meeting on March 21 and 22. However, after the unexpected collapse of tech lender Silicon Valley Bank in California and the takeover of New York’s Signature Bank, the risk of a new financial crisis has increased, making the Fed’s next move less certain.

The Fed’s Challenge

Inflation is still a significant concern, but now the Fed’s top priority is to address the stress unfolding in a chunk of the banking system. Concerns around the possible European banking crisis after shares in Credit Suisse tanked have caused sensitive stocks like autos and industrials to fall. The increased likelihood further exacerbates the rising risk of a recession that banks will limit their lending.

Now, analysts are suggesting that there’s a chance that the Fed might sit tight next week and not hike up the rates for the time being. However, since economically sensitive stocks were hit due to concerns about declining goods and services demand, a rate hike may further decrease the purchasing power.

Headaches from High Prices Remain

Despite the October 2022 rate hike, the Fed’s job concerning inflation isn’t done, as the consumer price index rose at an annual rate of 6% in February. Although inflation is down, February’s report still falls far behind expectations. Nevertheless, shelter inflation remains strong, and declining rents should be good news. A rate hike of at least 25 basis points would have been expected next week; however, uncertainty has become a factor.

Related Facts

• The Fed has missed inflation targets for the most significant part of the past decade and is now concerned with the possibility of inflation running too high.
• The Fed is concerned that higher wages have contributed to rising inflation rates due to the tightness of the labor market and higher production costs due to supply chain problems.
• The Fed has still managed to keep employment strong during rate hikes.

Key Takeaway

While the Fed has been able to maintain employment during the rate hikes this past year, its next move concerning rates isn’t as straightforward as expected. With concerns around a new financial crisis and inflation still a concern, it remains a risky decision for the Fed to make.

Conclusion

This past year’s uncertainties surrounding the economy have made forecasting what the Fed will do next challenging. However, with the concerns around the financial system’s health and high inflation rates, the Fed’s job has become more complicated than expected. As a result, the Fed’s next move is being closely watched, as it could have a ssignificantly impactnomy’s health.