1679470334 Federal Reserve faces pivotal decision on rate hikes amid banking

Federal Reserve faces pivotal decision on rate hikes amid banking turmoil

The US Federal Reserve is due to make a crucial decision on Wednesday whether to continue its monetary tightening campaign or suspend interest rate hikes amid the worst banking turmoil since the 2008 financial crisis.

The interest rate decision will be announced Wednesday at 2 p.m. ET following the conclusion of the two-day Federal Open Market Committee meeting, after which Jay Powell will hold the press conference.

In a sign of how much the takeover of two failing banks has changed the Fed’s calculus, policymakers are debating whether or not to raise rates by a quarter point. Earlier in the month, Powell floated the idea that the Fed might accelerate the pace of rate hikes back to half a point.

The interest rate decision will be accompanied by a revised set of forecasts on the monetary policy path to 2025, as well as forecasts for growth, unemployment and inflation.

The Federal Reserve last released official estimates in December, when most thought the federal funds rate would peak at 5 to 5.25 percent. It is currently hovering around 4.50% to 4.75% after returning to more traditional gains of a quarter point in February after months of larger gains.

Another quarter-point move on Wednesday would lift the federal funds rate to a new target range of 4.75 percent to 5 percent.

The debate over the Fed’s next move comes as officials face acute uncertainty about the economic outlook following the implosion of Silicon Valley Bank and Signature Bank earlier this month.

In an attempt to contain the contagion among middle-class lenders, the central bank – along with the Treasury Department and the Federal Deposit Insurance Corporation – intervened aggressively and guaranteed the deposits of the two failed banks. The Fed has also launched an emergency facility to help lenders more broadly.

On Tuesday, Treasury Secretary Janet Yellen said authorities are ready to take further steps to shore up the financial system if needed, including extending government guarantees to more small lenders.

Federal Reserve faces pivotal decision on rate hikes amid banking

Her comments followed an announcement Sunday by the Fed and five other top central banks that they would improve access to US dollar liquidity following last weekend’s forced takeover of Credit Suisse by UBS, brokered by Swiss officials.

Complicating the Fed’s decision is uncertainty over whether global authorities have done enough to keep the banking system from further contagion and how severe the economic shock from mid-tier lender pullbacks will be.

Those in favor of a pause argue that the central bank could further unsettle an already unstable situation by pushing for another rate hike and that the imminent credit crunch could mean a deeper recession.

However, supporters of further rate hikes say economic conditions do not warrant a pause right now, especially after the strong jobs and inflation data released since February’s monetary policy meeting.