Analysts had been leaning toward the idea that the U.S. Federal Reserve would raise its key federal funds interest rate a half point at next week’s meeting to tamp down a jobs market that added a surprising 311,000 jobs in February as more people returned to the labor market.
Unemployment, at 3.6 percent, hovers near a multi-decade low.
Then last week brought news that two U.S. banks have failed, with regulators closing a third on Sunday (see our “Special Report: The Big Bank Bust” in this issue), prompting those same analysts to think the Fed might stick with the quarter-point bump, or even forego an increase, amid fears that the country’s financial system is tottering.
On 10 March, gamblers in the interest-rate futures market were estimating a 60-percent chance the Fed will stay with a quarter-point increase after oddsmakers dropped the likelihood of a half-point hike from 70 percent to 40 percent.
If the Fed is vacillating between a rate rise of 25 or 50 basis points, “you’d be more inclined to go 25 at this point because of added concern” over the bank failures, Eric Rosengren, former president of the Federal Reserve Bank of Boston, said in comments quoted by the Financial Times.
Raising interest rates as quickly as the Fed has done has not left time for the central bank to see what delayed effects its policy shifts are having, he added.
“Having a close-to-$200-billion bank have a liquidity problem that caused a failure has to be a concern,” he said. Fed officials will “want to be able to evaluate the impact it’s going to have on broader financial markets” before they raise rates sharply again.
The Fed is keeping its options open, chair Jerome Powell said in Congressional testimony last week.
However, “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Since the Fed’s last meeting on 1 February, reports have shown that hiring, inflation, and spending all were stronger than expected. (See “Hiring, Economy in General Show Continued Strength” in this issue.)
“Nothing about the data suggests to me that we’ve tightened too much,” Powell told Congress.
The inflation report, due for release today, also will bear on the rate-setting committee’s decision, he added.
“Absent a surprise” in the inflation report, “we think [the Fed] will be comfortable” raising the rate by a quarter point, analysts at Dreyfus and Mellon wrote in a note.
Their surmise is based on the assumption that the rise in the Consumer Price Index has not exceeded 0.4 percent from January through February.
If, instead, today’s report shows the rise in consumer prices has not meaningfully slowed, “it will have been very hard to have opened the door [to a half-point rate hike] and not walk through that door,” Harvard economist and former Obama advisor Jason Furman told the FT.
TREND FORECAST: As we note, the guess on The Street is that the Fed will raise interest rates 25 basis points next week.
As to where interest rates are heading in the future, it’s a pure guessing game since there are so many financial wildcards that have to have been played.