U.S. Federal Reserve Chair Jerome Powell addresses reporters after the Fed raised its target interest rate by a quarter of a percentage point, during a news conference at the Federal Reserve Building in Washington, February 1, 2023.
Jonathan Ernst | Reuters
The Federal Reserve is expected to raise interest rates Wednesday by a quarter point, but it also faces the tough task of reassuring markets it can stem a worse banking crisis.
Economists mostly expect the Fed will raise its fed funds target rate range to 4.75% to 5% Wednesday afternoon, though some expect the central bank could pause its hiking due to concerns about the banking system. Futures markets were pricing in a roughly 80% chance for a rate hike, as of Tuesday morning.
The central bank is contemplating using its interest rate tools at the same time it is trying to soothe markets and stop further bank runs. The fear is that rising rates could put further pressure on banking institutions and crimp lending further, hurting small businesses and other borrowers.
“The broader macro data shows some further tightening is warranted,” said Michael Gapen, chief U.S. economist at Bank of America. He said the Fed will have to explain its double-barreled policy. “You have to show you can walk and chew gum at the same time, using your lender-of-last-resort powers to quell any fears about deposit flights at medium-sized banks.”
Federal regulators stepped in to guarantee deposits at the failed Silicon Valley Bank and Signature Bank, and they provided more favorable loans to banks for a period of up to one year. The Fed joined with other global central banks Sunday to enhance liquidity through the standing dollar swap system, after UBS agreed to buy the embattled Credit Suisse.
Investors will be looking for assurances from Fed Chairman Jerome Powell that the central bank can contain the banking problems.
“We want to know it’s really about a few idiosyncratic institutions and not a more pervasive problem with respect to the…
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