The banking meltdown put the Fed in a bind | CNN Business

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With the Federal Reserve’s next interest rate decision just days away, U.S. policymakers are sitting between a rock and a hard place.

Recent Destruction of banking sectorpowered in part by Silicon Valley Bank Falling Under the weight of high interest rates, some economists and analysts have been forced to call for a Ban on increase in rates Until the industry fixes itself.

At the same time, inflation is well above the central bank’s 2 percent target, economic data continue to show. Labor market strength And The elasticity of consumer spendingand Fed officials have. Indicated They intend to aggressively tighten monetary policy until inflation eases.

“The backdrop of high inflation means this. [the Fed] is in a more fragile position than it has been in the past 40 years,” EY chief economist Gregory Daku wrote in a note Thursday. In past years, the Fed has eased policy without worrying about price stability, he said. was able to respond “unwaveringly” to financial risks. But today’s situation is “very different with still very high inflation.”

So what should policymakers do at their March 21-22 meeting?

Fame Game: The question isn’t about what the Fed should do, it’s about what the Fed will do, Daco said. “And Inheritance Could be the defining factor,” he added.[Federal Reserve Chair Jerome Powell] And most policymakers don’t want their legacy to fail to bring inflation down to the 2 percent target.

This was the view. European Central Bank On Thursday, President Christine Lagarde announced an aggressive half-point interest rate hike just hours after Credit Suisse accepted a $53.7 billion loan.

Lagarde chose to portray the rate hike as a sign that the financial system is strong. He told reporters on Thursday that the central bank has the tools in place if it needs to respond to a liquidity crisis “but that’s not what we’re seeing.”

Lagarde emphasized that European banks are much more resilient than before the global financial crisis, with strong capital and liquidity positions, and no concentration of exposure to Credit Suisse.

Most large banks have some level of financial relationship or relationship with other banks, either because they have made loans to, invested in, or have other financial agreements with those banks. But in the case of Credit Suisse, which has been A slow-moving car wreck over the years, Many large institutions have already distanced themselves.

The ECB’s stance opens the door for a big hike from the Fed next week.

“Implications [of the ECB hike on] The Fed meeting next week suggests the Fed will raise rates. [a quarter point] based on future prospects, but it will make it clear that the stability of the banking system remains strong,” said Quincy Crosby, chief global strategist at LPL Financial.

Dual Track Approach: The Fed will likely borrow another tactic from the ECB: carefully separating its inflation-fighting campaign from its work to contain financial system woes.

By implementing this dual-track approach, “the Fed will continue to gradually tighten monetary policy while closely monitoring financial market developments,” Daco said.

Under the plan, Powell will use his press conference on Wednesday to emphasize the separation between monetary policy and the Fed’s work to reduce the risk of catastrophic failures in the financial world.

Predictions: According to the CME FedWatch tool, a majority of investors are betting the Fed will raise rates by a quarter point next week, although a significant minority is pricing in a pause in hikes. Prior to the current stress in the banking sector, Fed officials were signaling that they would raise rates by half a point. Investors now think there is a 0% chance of this happening.

But some economists say Wall Street could be in for a surprise on Wednesday.

“Markets have lowered their expectations for the path of interest rates, expecting central banks to come in to save the economy by cutting rates as they do in episodes of financial stress,” BlackRock analysts wrote on Thursday. What were you doing?” “We believe this is misleading and the major central banks are expected to maintain rate hikes at their meetings in the coming days to rein in persistent inflation.”

As it was before: scolding, Seema Shah, chief global strategist at Principal Asset Management, said the situation Powell now faces is unprecedented.

“Every central bank tightening cycle in history has produced some form of financial stress,” he wrote on Thursday. “Until this week, markets had largely ignored the risks that tighter policy was starting to unravel. However, the latest turmoil has sharply reminded investors that risk assets are only financial. Can’t escape from the wrath of hardness.

Eleven major US banks have. Extension A $30 billion lifeline to First Republic Bank in an effort to save the regional lender from the fate of its industry peers, Silicon Valley Bank and Signature Bank.

Shares in First Republic sank last week after SVB collapsed and reports circulated that the bank was exploring a possible sale. On Thursday, the group of financial titans announced they would provide the bank with enough money to meet demand for withdrawals and hopefully restore some confidence in the safety of the US banking system.

“This show of support from a group of major banks is very welcome, and demonstrates the resilience of the banking system,” the Treasury Department said in a statement on Thursday.

Major banks include JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Truist.

In a statementthe banks said their action “reflects their confidence in First Republic and banks of all sizes,” adding that “regional, mid-sized and small banks are critical to the health and functioning of our financial system.” are.”

Speaking of lifelines, troubled megabank Credit Suisse may need more help to stay afloat, Reports CNN’s Mark Thompson.

Banking analysts at JP Morgan said the $53.7 billion bailout offered by the Swiss central bank would not be enough, with Credit Suisse’s plan to create its own investment bank “ongoing market confidence issues” and broader In view of the end of the business.

Consumers pulled 123 billion Swiss francs ($133 billion) from Credit Suisse in 2022 — mostly in the fourth quarter — and the bank reported an annual net loss of about 7.3 billion Swiss francs ($7.9 billion) in February, the highest in the world. It is the largest since the financial crisis. In 2008

“In our view, the status quo is no longer an option as counterparty concerns are beginning to emerge as evidenced by credit/equity market weakness,” JP Morgan analysts wrote in a research note on Thursday. A takeover — perhaps by a larger Swiss rival — is likely, analysts at JP Morgan wrote in a research note on Thursday. UBS (UBS) – was the most likely end game.