Markets globally are keenly looking forward to the outcome of the next Federal Open Market Committee (FOMC) meeting. The FOMC meeting is underway on March 21 and 22 with the Fed Chief announcing the rate hike decision on Wednesday, March 22 at 2:00 p.m. (ET). Federal Reserve chairman Jerome Powell will hold a news conference after the announcement of the rate hike decision on Wednesday.
The post-commentary conference will be an important event as markets will look for signals in Powell’s speech about how the Fed is tackling the ongoing banking crisis emerging amidst its quantitative tightening measures.
Meanwhile, the annual inflation rate in the UK unexpectedly edged higher to 10.4% in February of 2023 from 10.1% in January, the first increase in four months and compared to forecasts of 9.9%. “UK inflation showing systemic contagion. Core is up 0.9% YoY back to highs of 6.2% and the surprise print was significant in both its magnitude and breadth. BoE may be pressed to follow ECB suit tomorrow amid this Inflation upside surprise. Had there been an easing in inflation, the case of looking closer owing to market stress and some data weakness would have been there for BoE. But it seems not any more. 25bp hike likely tomorrow by BoE too”, says Madhavi Arora, Lead Economist, Emkay Global Financial Services.
Federal Reserve officials are faced with their most significant dilemma in months as they decide whether to stop amid the market upheaval caused by recent bank failures or continue hiking interest rates this week to curb inflation.
The Fed needed to stay aggressive in order to avoid overheating the economy, but rising yields have demonstrated how it can destroy banking balance sheets, leading to their closure. With the inflation battle half-won, Fed can hardly avoid any pause at this stage. A pause in rates may not only make inflation spike again but also send wrong signals to the market regarding Fed’s weakness in fighting the inflation battle. Markets were expecting a rate hike of 50 bps in early March but since the emergence of the Banking crisis, experts expect either a pause or a 25bps rate hike.
While discussing the probable course of interest rates in the future, Powell will likewise need to exercise caution. Prior to the emergence of the financial problems, Fed officials had said that rates would need to increase this year and stay there until inflation was on track to return to their target of 2%.
An update to the Summary of Economic Projections, a quarterly report outlining members’ projections for everything from inflation to interest rates, will also be eagerly awaited after the Fed meeting. Meanwhile, the risk of the economy entering a recession is increasing.