The Federal Reserve’s aim of combating the rapid inflation that has plagued American consumers since 2021 has become increasingly complicated. The expectation of a quarter-point increase in interest rates, to just above 4.75%, on Wednesday has been widely anticipated as part of their fight against rapid price increases. However, a series of high-profile bank closures and government rescues raised concerns about the economic outlook and financial stability, resulting in the Fed pumping up its program that keeps dollar financing flowing around the world.
Jerome H. Powell, the Fed chair, and his colleagues must now decide how to react to bank turmoil when it comes to interest rate policy, which guides the speed of the economy. Fed officials are expected to release a set of quarterly economic projections, indicating how high they expect borrowing costs to climb this year. Central bankers had expected to lift them to roughly 5% in 2023 and, before the market volatility, had hinted that they might adjust that anticipated peak even higher in their new projections.
The range of possibilities makes this the most uncertain central bank gathering in years, and there is little clarity as this week begins. Many Wall Street economists expected a quarter-point increase, but a few thought the Fed would hit pause, including economists at Goldman Sachs. “At least one or two anticipated an outright rate cut in response to the upheaval, as the central bank waits to gauge the severity of the economic and financial fallout,” as the bout of banking unrest is likely to weigh on the economy.
Diane Swonk, the chief economist at KPMG, said officials might scrap their economic projections altogether, given the vast uncertainty, which could add more confusion than clarity. This situation has made Mr. Powell’s upcoming news conference on Wednesday tense for several reasons. He is likely to face questions about what went wrong with the oversight of Silicon Valley Bank, the primary regulator, and the issues at the bank that had been known for over a year before its crash. Moreover, Mr. Powell will have to explain how officials are thinking about their policy path at a complicated juncture when the Fed will have to weigh economic momentum against blowups in the banking sector.
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