(Bloomberg) — Federal Reserve officials face their toughest challenge in months as they weigh whether to keep raising interest rates this week to curb inflation or take a break amid market turmoil fueled by recent bank failures.
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Before the Silicon Valley Bank collapse and the resulting fallout, Fed policymakers were on the verge of raising rates by as much as 50 basis points after a series of data suggested the economy was much stronger than policymakers thought at the time. beginning of the year.
Now, given financial market volatility, many Fed watchers expect a smaller quarter-point hike, and some say the US central bank will take a full break after a two-day meeting that begins on Tuesday.
The decision follows a 50 basis point hike in the European Central Bank rate on Thursday. President Christine Lagarde said the ECB remains committed to tackling inflation while closely monitoring banking tensions.
Also highly anticipated from the Fed meeting is an update to the Summary of Economic Projections – a quarterly report that features participants’ forecasts for everything from inflation to interest rates – and Chairman Jerome Powell’s post-meeting press conference.
Amid the turmoil in the banking sector, Powell is likely to face questions about the central bank’s oversight of the SVB and other distressed entities.
He will also need to tread carefully when talking about the likely future path of interest rates. Prior to the emergence of the banking issues, Fed officials had indicated that rates would need to rise above 5% this year and stay there until inflation was on track to fall back to the 2% target.
However, heightened uncertainty over the extent to which banks’ capitalization problems — exacerbated by the Fed’s rapid interest rate hikes and impact on Treasury yields — will affect the wider economy could limit Powell’s ability to tighten much further. from now on.
What Bloomberg Economics says…
“The FOMC faces its most challenging policy decision in recent memory on March 22nd. Market expectations have shifted dramatically – from a 50 basis point rally to a pause – as bank contagion fears displace inflation concerns. We expect the Fed to hike 25 basis points, taking the upper bound of 4.75% to 5%. The reacceleration of inflation maintains the pressure to continue rising.”
— Anna Wong, Chief US Economist For full analysis, click here
Elsewhere, 12 other central banks set policies in the coming week. Economists predict rate hikes in the UK, Switzerland, Norway, Nigeria and the Philippines, while Brazil and Turkey are likely to stay the same. Meanwhile, traders betting on the Bank of Canada rate path will get a new reading on inflation.
Click here for what happened last week and below is our summary of what’s to come in the global economy.
On Monday, the People’s Bank of China is likely to report that banks have left their preferred lending rates unchanged as the economy gradually recovers.
In Tokyo, a summary of views from the Bank of Japan meeting earlier this month will shed more light on the rationale for keeping monetary policy steady ahead of Kazuo Ueda taking the helm in April.
Reserve Bank of Australia official Chris Kent on Monday can offer an update on the political stance and any concerns about financial market contagion. Those remarks are likely to be more timely than the minutes from Tuesday’s March RBA meeting.
The first commercial issues from South Korea will offer a pulse check on global conditions.
Japan’s inflation numbers on Friday are expected to reflect earlier data that pointed to a cooling in prices, helped largely by new subsidized electricity bills.
The central banks of Hong Kong and Taiwan will announce their interest rates on Thursday.
Europe, Middle East, Africa
The Fed may be the central bank’s dominant decision this week, but several others will also get investors’ attention.
The Bank of England takes center stage in Europe. Policymakers are awaiting the latest reading of UK inflation on Wednesday, possibly showing that price growth is still close to double digits. Most economists predict rates will be raised by a quarter of a point the next day, although with financial tensions still simmering, a minority see no change.
Here’s a quick rundown of the other decisions due:
The Swiss National Bank meeting on Thursday is a quarterly and there is a recovery to be made, so an upside of up to 50 basis points is widely expected. Overshadowing the result is Credit Suisse Group AG, the battered bank offering a lifeline to help quell the global turmoil.
Same day in Norway, where authorities are expected to raise rates by another quarter of a point to extend the cycle of monetary tightening in the oil-rich economy.
An Icelandic decision is expected on Wednesday, with another big rate hike possible.
Looking south, central banks will also be very active. Here is a quick summary:
Nigeria may raise rates on Tuesday to curb inflation, which is close to an 18-year high, and to encourage investment.
On the same day in Angola, authorities may cut benchmark borrowing costs for the second time this year as the kwanza remains stable, commodity prices are subdued and a downward swing in price growth looks likely to continue.
In Morocco that day, the central bank is likely to take a break from monetary tightening as food prices start to fall.
And in Turkey, on Thursday, authorities are expected to keep rates steady. Any signs of future policy will be key as the country heads towards elections in May, in which President Recep Tayyip Erdogan faces his biggest challenge so far in his two decades in power.
After the ECB’s meeting on Thursday, which ended with a half-liter increase but no future guidance, more than a dozen of its policy makers will speak in the coming days. President Lagarde is likely to attract more attention with his testimony to the European Parliament on Monday.
More clues to the banking system’s background may be available when his ECB counterpart Andrea Enria, the eurozone’s top regulator, speaks to the same panel of lawmakers the next day.
Lagarde is also among officials taking the stage at the ECB conference and its observers in Frankfurt on Wednesday, and several more are scheduled to make appearances elsewhere during the week.
Meanwhile, purchasing managers’ indices in the euro zone and the UK will give an indication of industry strength as China reopens, and the German Council of Economic Experts will publish an updated growth outlook.
A busy week in Brazil kicks off with the central bank’s survey of market expectations on inflation, which remains above target through 2025.
The Central Bank of Brazil is all but certain to keep its base rate at 13.75% for a fifth consecutive meeting, although policymakers could strike a pacifist tone in the post-decision statement.
After minimal disinflation in the last three mid-month consumer price readings, analysts see a sharper slowdown in the mid-February and Q2 print due to base effects, before a small increase in the second half.
Chile’s Q4 production report may show the Andean country narrowly avoided falling into a technical recession, due in part to untapped domestic liquidity and the impact of China’s reopening.
In Argentina, four consecutive negative readings in its monthly economic activity indicator point to a quarterly contraction in production heading towards a challenging 2023.
In Mexico, the weakness seen in retail sales since May likely extended into January, while the drop in demand from the US, the country’s biggest export market, could weigh on the GDP proxy data for January.
The initial consensus is that mid-month inflation is approaching a one-year low – albeit still more than double the 3% target – while the slightly tighter core reading extends a decline from the two-decade high of 8.66% in November, in line with Banxico forecasts.
–With assistance from Robert Jameson, Malcolm Scott, Sylvia Westall and Stephen Wicary.
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