With fresh cracks developing in the United States banking system, there is a growing chance that the Fed will not raise rates in the coming week. This speculation is because rate hikes may not ease inflation but catalyze a recession.
However, according to other analysts, due to the Fed’s actions in deploying measures to ease bank stress and the persistence of inflation, the Fed will likely raise rates.
Fed’s Tough Decision: Inflation or Financial System Safeguarding?
The upcoming meeting will be difficult for policymakers since, on Wednesday, they have to decide whether to go on a full-fledged fight against inflation or work to safeguard the financial system in the United States.
The market is betting that the US banking sector will force the policymakers to stop the monetary tightening, if not in the next meeting, then in the one after that. 80% of the participants anticipating a rate hike put it at 0.25%, while 20% suggest a tighter rate hike.
Most investors agree that the Fed must stop the monetary tightening before the summer. According to FXStreet, the broader banking system is well-suited to absorb the shock it has been receiving, and the chances of a Lehman-style meltdown are very low.
The biggest pressure falls on the smaller banks in the regional threshold, but the Fed has already created a “war chest” to help secure these banks.
The Fed insists that the main enemy remains inflation and has stressed that the metric they care about most is the services inflation, which saw a 6.9% increase in the last data release. However, this data needs to be lowered, and when put together with the other employment indicators, it does not allow the Fed to raise the rates further.
Last week, Jerome Powell warned that the rates might surpass the benchmark they proposed in the last month of 2022. The Fed had put the figure at 5.1%, but the current market analysis puts the figure at 4.2%. This gap is massive, and if the predictions are retained or the Fed does a further hike, the markets would be in shock.
UK Remains Positive Despite Inflation and Brexit Workforce Problems
The UK remains out of the spotlight as investors are drawn to the banking crisis in the EU and US. However, all news from the kingdom has been upbeat in the political and economic zones. After several surveys showing a recession is imminent in the UK, the figures have been disapproving.
However, this upbeat mood in the UK does not mean inflation is gone. Instead, inflation numbers are coming in double digits, with the country seeing a surge in electric prices due to post-Brexit workforce problems elevating the issues.
The country will receive the inflation data update on Wednesday, ahead of the rate decisions coming in the week, alongside data from retail sales. The biggest data event will be on Thursday, with the BOE expected to announce its rate decision.
Markets place the decision at 50-50 for a 25 basis point rate hike, but according to analysts, this figure will be fair given the condition of the market in the US. The UK’s economic resilience in the face of Brexit and inflation is impressive, but challenges remain.