Fed in a Fix! Will the US Federal Reserve pause, raise rates by 50 bps or continue with 25 basis points?

The US Federal Reserve may be finding itself against the wall and in the meanwhile, it is keeping Wall Street playing the guessing game.

Federal Reserve, rate hikes, inflation, US Fed, FOMC meeting, date
The debacle of Silicon Valley Bank is partly attributed to the Fed's tightening measures.

The US Federal Reserve (Fed) may be finding itself against the wall. And, in the meanwhile it is keeping Wall Street playing the guessing game – will the US Fed pause, hike rate by 50 basis points or stick to raising rates by 25 basis points on March 22? The FOMC meets on March 21-22 to take a decision on the interest rate hike.

A rate hike of 25bps was a given since the last FOMC meeting held on January 31- February 1 when Fed raised rates by 25bps taking the Federal Funds rate range to 4.5%-4.75%. But, market expectations changed after Fed Chief testified in front of US Congress and hinted at remaining aggressive in its approach to bringing inflation under 2%. Meantime, job sector report and consumer spending data also showed that inflation might throw negative surprises for the Fed unless more hikes take place.

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The tables turned when the news of the Silicon Valley Bank (SVB) collapse came out in open. US regulators had to step in to backstop depositors of SVB and open credit lines for other regional banks looking for liquidity. Many industry experts attributed the debacle of SVB to Fed’s extreme tightening measures by raising rates from near zero to almost 5%.

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In such a scenario, on the one hand, Fed’s aggressiveness may hurt banking sector companies but on the other hand, inflation may spike if Fed goes slow. The core inflation in February shows that the Fed’s battle against inflation is hardly over.

Since Fed Chief Powell’s Senate testimony, the markets are expecting a 50 bps rate hike on March 22. The release of macro data in the next two weeks such as the Jobs Report, Consumer Price Index, Producer Price Index, and retail sales, may strengthen the case for the Fed to raise the fed funds rate by 50 basis points (bps) in its March 22 FOMC meeting.

However, February’s US CPI data shows inflation is cooling as per the market expectations. This may keep the Fed on its path of the slow pace of rate hikes by jacking up rates by 25bps. Still, if more US regional banks go turtle and the banking sector witnesses more bank failures, the Fed may want to take a pause before restarting the rate hike exercise later. The implications of taking a pause without inflation being tamed could be much more severe in the long run. Fed will take decisions based on incoming data and there are at least five more days to decide on that.

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First published on: 16-03-2023 at 17:47 IST
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