By Lindsay Dunsmuir
(Reuters) – Traders and economists remain split on whether the Federal Reserve will raise its benchmark policy rate on Wednesday, as more actions by the world’s major central banks to stem banking strains and the fallout from the takeover of Credit Suisse kept markets on edge.
Prices of Fed funds futures reflected a roughly 65% probability of a quarter-percentage point rate hike versus about a 35% chance of no change as U.S. markets opened on Monday, in line with similar expectations at the end of last week
The U.S. central bank will begin its two-day policy meeting on Tuesday as policymakers consider whether still too-hot inflation merits an interest rate hike or whether turmoil in financial markets outstrips those concerns. The Fed’s current target range is 4.5%-4.75%.
“I don’t think the Fed has any good options here,” said Tim Duy, chief U.S. economist at SGH Macro Advisors. “The risk is allowing inflation to become even more embedded versus the risk of aggravating a broader banking crisis.”
The Fed usually likes to telegraph the expected outcome of its policy meetings in order not to unsettle financial markets but the fast pace of events in the past week, in which two U.S. regional banks collapsed and Credit Suisse was rescued by larger rival UBS at the weekend, has upended those norms.
On Sunday, the Fed, as part of a coordinated action, offered daily currency swaps to banks in Canada, Britain, Japan, Switzerland and the euro zone in order to ease funding stress in global markets, although banks borrowed only token amounts on Monday.
The tumult has also occurred during the central bank’s premeeting blackout period that prevents officials from offering public clarity on their assessment of the situation.
TO HIKE OR NOT TO HIKE?
“Barring a catastrophic collapse of the banking sector between today and Wednesday — one that reverberates globally — they will be focused on developments in the economy, which currently supports more policy tightening,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, who forecasts a quarter percentage point rate increase.
She pointed to a string of recent economic data, including a key inflation report last week, that suggest inflationary pressures are far from tamed, and expects the Fed this week to lift its median projection for the funds rate at year-end to 5.4% from 5.1% at December’s meeting.
Analysts at Goldman Sachs, instead, predict a pause at the meeting this week owing to the current volatility and helped by a sharp drop in near-term inflation expectations. The investment bank then expects three more 25 basis point hikes in May, June, and July, with the policy rate peaking in the 5.25-5.5% range.
“While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient,” they wrote. “We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now.”
(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)
