The Federal Reserve (Fed) began raising interest rates last year in an effort to tame inflation. However, inflation has not come down as much as expected, with some metrics suggesting it may have started to rise again. Fed Chair Jerome Powell recently testified to US politicians that the central bank was determined to raise interest rates and keep them higher for longer in response to this news. However, an increase in inflation caused concern and when Silicon Valley Bank went under, a banking crisis ensued. Despite this, the Fed continued with its planned rate hike, causing some confusion in the markets. Powell acknowledged the banking crisis, but also noted that the Fed is prepared to use all its tools to prevent further crises. The Fed is still focusing on its inflation target and monetary policy will depend on incoming data. Despite predictions of a recession, the Fed sees interest rates at 5.1% by the end of the year.
—
The Federal Reserve’s Pivot and the Banking Crisis: What it Means for the Markets
Background
The Federal Reserve began raising interest rates almost a year ago to tame inflation. The prospect of a pause or a pivot had caused markets to rally earlier this year. However, higher inflation data suggested that the Fed needed to raise interest rates more than it already had, causing the Fed to introduce the bank term funding program (BTFP) to address the liquidity crunch.
Jerome Powell’s Speech
During his subsequent speech, Chairman Jerome Powell addressed the elephant in the room, the banking crisis, acknowledging that there had been difficulties at some banks. He confirmed that the Fed was prepared to use all its tools to prevent a true banking crisis from occurring, implying that the Fed may lower interest rates if necessary.
Summary of Economic Projections
Jerome Powell cited the Fed’s Summary of Economic Projections (SCP), indicating that officials see the economy weakening and unemployment rising by the end of the year if interest rates continue to increase. He warned that inflation remained above the Fed’s target, and shrinking the Fed’s balance sheet would cause interest rates to rise.
The Question Period
During the question period, a reporter from Financial Times asked whether the Fed had considered pausing its rate hikes because of the banking crisis. In a rare move, Jerome Powell confirmed that the Fed had settled on a 25 basis point hike, estimating that tightening would continue.
Conclusion
Despite mixed messages from Jerome Powell’s speech and other U.S government officials, it seems likely that the Fed will continue to raise interest rates until inflation comes down. However, whether the Fed decides to raise interest rates again will depend on the incoming data, and the focus on inflation will remain a top priority.
