The market is currently sitting tight, anticipating a 0.25% rate hike decision from the Federal Reserve. This decision comes amid a growing political storm over how the country’s central bank handled the oversight of the SVB bank and how the whole financial and economic outlook is all hanging on the policymakers’ words.

Jerome Powell and his colleagues are facing their second institutional crisis in under five years, with the failure of SVB drawing scrutiny from across the political spectrum. Moreover, the market continues to call for the central bank’s reforms on oversight and governance.

This crisis is the second in Jerome’s tenure, with the initial incident being the stock trading by Fed officials. Two Fed presidents resigned due to the scandal, leaving Jerome to launch an overhaul of rules as the markets’ criticism mounted over the institution.

SVB Requires a Deeper Look

Recently, Jerome indicated that the failure of SVB required a deeper look and a thorough and swift review. The review would examine the bank supervision with a low profile on Wall Street. He suggested that it would be prudent to understand how such a small institution could rock the world’s financial confidence in such a manner.

The lack of proper supervision by the institution has complicated the matter of rate decisions, and there is a surprising and rising threat of financial instability. Initially, the Fed focused on interest rate hikes to curb stubborn inflation.

Senator Rick Scott wrote a letter to the Fed governor, asking the policymakers to address the misconduct behind SVB and Signature bank’s collapse and calling for those responsible for being fired. Elizabeth Warren, another US senator and a long-time critic of Powell, stated that she had lost all confidence in Mary Daly, the San Francisco Fed president whose central bank oversaw SVB.

The Fed has shed light on the bank’s supervision, stating that the review is underway and will be concluded before the first of May and released to the general public. However, the markets remain in turmoil, and the banking system will likely continue to feature in Jerome’s after-speech.

The US central bank will also release economic projections from the Fed before the FOMC meeting. The banking stocks have declined by 20%, and their value remained volatile in the last two weeks, but as of Tuesday, they are gaining some footing. This uptick comes from the latest Fed tactic to restore market confidence.

The Treasury yields had declined in a flight by investors to stay safe, but they are gaining some ground. According to the Fed’s words in the afternoon, we could see if the calm holds or if the market tumbles into deeper insecurity.

The Problem with Rate Hikes

The Fed rates are key to the week and the rest of the year. If the Fed raises interest rates further, the down pressure on banks will exacerbate the banking crisis. As a result, a pause in rate hikes until the crisis in the banking sector ends is a prudent approach.

The move would put immense pressure on the Fed as the market would see it as a sign of the Fed backing down in commitment to ending inflation, making the banking problem seem worse than it may be.

According to Reuters, former Fed officials have been giving their views on the situation, with divergent views on the two problems weighing on the Fed.