(Bloomberg) — Federal Reserve officials face their biggest challenge in months as they weigh whether to continue raising interest rates this week to cool inflation, or take a break amid the turmoil on the economy. market fueled by recent bank failures.
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Before the collapse of Silicon Valley Bank and the ensuing 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 officials at the start of the year thought.
Now, given the volatility in financial markets, many Fed watchers are expecting a smaller quarter-point increase, and some say the U.S. central bank will pause altogether after a two-day meeting starting Tuesday.
The decision follows a rate hike of 50 basis points by the European Central Bank on Thursday. President Christine Lagarde said the ECB remains committed to fighting inflation while closely monitoring tensions between banks.
The Fed’s meeting is also highly anticipated with an update to the Summary of Economic Projections — a quarterly report that includes 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 central bank oversight of SVB and other struggling entities.
He will also have to be careful when talking about the likely future path of interest rates. Before the banking problems came to light, Fed officials had signaled that interest rates should rise above 5% this year and stay there until inflation is at the right pace to fall back to their target of 2%.
But heightened uncertainty about the extent to which bank capitalization issues — exacerbated by the Fed’s rapid rate hikes and the impact on Treasury yields — will affect the broader economy may limit Powell’s ability to tighten much further in the future. .
What Bloomberg Economics Says…
“On March 22, the FOMC faces the most challenging policy decision in recent history. Market expectations have shifted sharply – from a 50 basis point increase to a pause – as fears of bank contagion dissipate inflation concerns. We expect the Fed to raise rates by 25 basis points, bringing the cap from 4.75% to 5%. Re-accelerating inflation maintains pressure to keep walking.
— Anna Wong, US chief economist. Click here for a full analysis
Elsewhere, more than a dozen other central banks will set policy over the next week. Economists are forecasting rate hikes in the UK, Switzerland, Norway, Nigeria and the Philippines, while Brazil and Turkey are likely to hold. Meanwhile, traders betting on the Bank of Canada rate path are getting another reading of inflation.
Click here for what happened last week and below is our recap 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 lending prime rates unchanged as the economy gradually recovers.
In Tokyo, a summary of advice from the Bank of Japan meeting earlier this month will shed more light on the rationale for maintaining monetary policy ahead of Kazuo Ueda’s arrival at the helm in April.
Reserve Bank of Australia official Chris Kent could provide an up-to-date look at policy stance and any concerns about financial market contagion on Monday. Those comments will likely prove more timely than Tuesday’s minutes of the RBA meeting in March.
Early trade numbers from South Korea provide a pulse check of global conditions.
Japan’s inflation numbers on Friday will mirror previous data pointing to a cooling in prices, aided largely by newly 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 draw investors’ attention.
The Bank of England is central to Europe. Officials await the latest UK inflation reading on Wednesday, which may show price growth still close to double digits. Most economists predict interest rates will be raised by a quarter point the next day, but as financial tensions are still simmering, a minority see no change.
Here is a brief overview of the other decisions to be made:
The meeting of the Swiss National Bank on Thursday is a quarterly meeting and there is some catching up to do, so a gain of as much as 50 basis points is widely expected. The outcome is overshadowed by Credit Suisse Group AG, the stricken bank that provided a lifeline to contain the global turmoil.
The same day in Norway, where officials are expected to raise interest rates another quarter of a point to extend the monetary tightening cycle in the oil-rich economy.
An Icelandic decision will follow on Wednesday, with a possible new large rate hike.
Looking south, central banks will also be very active. Here’s a quick summary:
Nigeria may raise interest rates on Tuesday to contain inflation near its highest level in 18 years and to encourage investment.
On the same day in Angola, officials may cut borrowing costs for the second time this year as the kwanza remains stable, commodity prices moderate and a downward movement in price growth is likely to continue.
In Morocco, the central bank will most likely pause monetary tightening that day as food prices begin to fall.
And in Turkey, officials are expected to keep rates stable on Thursday. Any signs of future policy will be crucial as the country heads towards elections in May, where President Recep Tayyip Erdogan faces the biggest challenge yet in his two decades in power.
After Thursday’s ECB meeting, which ended with a pint increase but no future advice, more than a dozen of its policymakers will speak in the coming days. President Lagarde is likely to attract the most attention on Monday with his testimony before the European Parliament.
More clues to the background of the banking system may become available when her ECB colleague Andrea Enria, the euro region’s top regulator, talks to the same panel of lawmakers the next day.
Lagarde is also among the officials who will take the stage at the ECB and Its Watchers conference in Frankfurt on Wednesday, with several others appearing elsewhere during the week.
Meanwhile, purchasing managers’ indices in the Eurozone and the UK will provide an indication of industry strength as China reopens, and the German Council of Economic Experts will release an updated growth forecast.
A busy week in Brazil begins with the central bank examining market expectations for inflation, which will continue to be further above target through 2025.
It is almost certain that Banco Central do Brasil will keep its policy rate at 13.75% for the fifth meeting in a row, although policymakers may take a more dovish tone in the post-decision statement.
After minimal disinflation over the past three semimonthly consumer price readings, analysts expect a stronger slowdown for the mid-February release and into the second quarter due to base effects before a rebound in the second half.
Chile’s fourth-quarter output report could show that the Andean country narrowly avoided sliding into a technical recession, due in part to untapped household liquidity and the impact of China’s reopening.
In Argentina, four consecutive negative numbers on the monthly economic activity indicator point to a quarterly contraction in output heading into a challenging 2023.
In Mexico, the weakness in retail sales since May is likely to last into January, while falling demand from the US, the country’s largest export market, is expected to weigh on January’s GDP proxy data.
Early consensus says mid-month inflation is close to a one-year low — though still more than double the 3% target — while the slightly more sticky core reading extends a decline from a two-year high November decades of 8.66%, in line with Banxico forecasts.
–With assistance from Robert Jameson, Malcolm Scott, Sylvia Westall, and Stephen Wicary.
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