Fed Caught Between Inflation and Bank Crisis

All eyes in the financial and economic world will be laser-focused Wednesday on the Federal Reserve as Chair Jerome Powell tries to balance his fight against inflation against a sudden banking crisis.

Powell and his colleagues began their meeting Tuesday with the outcome unusually unclear. While most economists expect a quarter-point interest-rate hike, some say policymakers should pause to shore up financial stability.

“This tension is leading to existential angst,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “Have they gone too far, or not far enough? Both could be true at the same time.”

Another important element of this week’s meeting: Policymakers are set to issue updated rate projections for the first time since December, offering crucial guidance on whether they still expect any additional hikes this year.

The decision and forecasts will be released at 2 p.m. in Washington. Powell will hold a press conference 30 minutes later.

Market Odds

As of Wednesday morning, markets were pricing in about 84% odds that the Fed will raise rates by a quarter point, to a range of 4.75% to 5%, the highest since 2007 on the eve of the global financial crisis.

Still, uncertainty over the decision is among the highest since the Covid-19 pandemic sparked emergency rate cuts in 2020.

Expectations for rate hikes among investors and economists have declined over the last two weeks, amid the collapse of three US regional banks and the takeover of Switzerland’s Credit Suisse Group AG.