The Federal Reserve will tell us more on Wednesday about how officials made one of the hardest decisions they have had to make in years: raising interest rates by a quarter of a percentage point despite signs that price pressures will not go away. This was done despite the fact that bank failures shook the markets last month.
The Fed raised rates last month, putting their benchmark rate in a range of 4.75–5%. Chair Jerome Powell told reporters after the March 21–22 Federal Open Market Committee meeting that there was “very strong consensus” among committee members. All eyes will be on the minutes from that meeting, which will be made public in Washington on Wednesday at 2:00 p.m., to learn more about the argument.
Veronica Clark, an economist at Citigroup Inc., said, “The overall message should still be that there is a lot of uncertainty, but we know that we still have an inflation problem, and that will be number one.”
Thinking About Trade-offs
The rate hike in March happened during a time of chaos. Silicon Valley Bank had just failed less than two weeks before, and Fed officials did not know how widespread the problems in the banking system would be. Since inflation was still much higher than the Fed’s goal of 2%, officials raised rates, but not as much as some Fed watchers thought they would before the bank problems started.
A key measure of inflation in the US showed signs of slowing down last month, according to data that came out earlier on Wednesday. The Fed pays close attention to the core consumer price index, which does not include food and energy costs. In March, the index rose 0.4% from the previous month, which was in line with what experts expected.
Analysts will look at the minutes to see how officials weighed the need to tighten more to bring inflation down against the risk of making financial markets even more nervous.
Powell and many of his colleagues have asked in the weeks since the meeting about how much tighter loan conditions will affect the economy as the Fed tries to slow down inflation and the job market.
Future Policy
Because of how hard it is to guess, economists and market participants are scratching their heads about where Fed policy could go from here.
In March, Fed officials took out the part of their post-meeting statement that said the policy rate should be raised “ongoingly.” Instead, they said that “some” more tightening may be needed. According to their median prediction, they also thought that interest rates would go up to 5.1% by the end of the year. This would mean one more quarter-point move.
Since the policy is now made much more at each meeting, investors will look at the minutes to see how many officials are likely to back more hikes.
Brett Ryan, a senior US economist at Deutsche Bank AG, said, “Things have changed. Markets have become more stable and less volatile, but how is the base case changing?” “It is very important to see how much this latest event has cut down the chances of rate hikes in the future,” he said.
Bank Effects
The minutes from the Fed’s March meeting will also tell us a lot about how the top banking regulators in the country saw the risks to the country’s financial security caused by the bank failures and their effects.
The minutes from their last meeting at the beginning of February showed that some of the problems that led to SVB’s failure, like unrealized losses in their Treasury holdings, were talked about as a possible risk to the banking sector.
Powell said at the press conference after the meeting in March that officials did not know why SVB was selling so fast. And John Williams, president of the New York Fed, said this week that he did not think the Fed’s bold rate hikes were causing stress in the banking sector.
It is not clear how much or how long tighter credit conditions will hurt the economy, but a pullback in loans could help the Fed in its efforts to slow inflation.
“They are getting more and more confident that they have avoided a crisis,” said Stephen Stanley, chief US economist at Santander US Capital Markets LLC. “If they were willing to move forward then, I think they would probably be more willing to move forward now, assuming it is necessary.”
