This is why the Federal Reserve could stay the course and raise interest rates again.

The possibility of the Federal Reserve raising interest rates by a quarter point next week is increasingly likely, with more than 80% of the odds reflecting a potential hike. However, concerns over the financial system’s stability could swiftly change the central bank’s policy. While it’s a close call for next week’s meeting, the current regulatory efforts to support the banking system are expected to be effective. As a result, negative news will be limited, potentially allowing the Fed to shift its focus back to inflation.

A fluid situation

The situation remains fluid, and the markets’ response during the meeting could lead to a change in policy. Although shares of regional banks have already climbed, Treasury yields have risen, and worries about bank contagion have eased, the Fed’s approach to recent US bank failures and concerns about Credit Suisse remains unclear from the varying views of economists. For example, the differing responses from JPMorgan and Goldman Sachs economists highlight the potential for policy shifts.

An opportunity to reverse course, if needed

The financial system is unpredictable, and the possibility of temporary policy reversals following a potential rate hike remains a reasonable option for the central bank. Moreover, the Fed can cut rates if the regulatory measures, targeted approach, and efforts to support individual institutions do not work, allowing them to deal with financial instability as needed.

Related Facts

• The Fed is expected to announce its decision regarding the interest rate next Wednesday.
• Market odds for a Federal Reserve rate hike have fluctuated significantly in the last few days.
• The European Central Bank went ahead with a half-point rate hike earlier this week.
• The Swiss National Bank has calmed concerns about the health of Credit Suisse.
• Participating institutions, including JPMorgan, Citigroup, PNC, and Truist, agreed to deposit $30 billion into First Republic Bank.

Key Takeaway

The Federal Reserve’s decisions regarding interest rates are critical to the stability of the economy and financial system. While the potential for a quarter-point rate hike next week looms large, the financial system’s unpredictable nature could lead to policy changes. In addition, the Fed can cut rates if necessary, allowing for policy reversals during financial instability.

Conclusion

The current regulatory efforts to support the banking system and the limited negative news could potentially allow the Federal Reserve to shift its focus back to inflation, leading to a quarter-point rate hike next week. However, with the financial system remaining uncertain and the possibility of temporary policy reversals, the Fed must remain flexible and adjust its approach to maintain stability.