Entered to consider a break as a bill of SVB Roils Markets

(Bloomberg) — Federal Reserve officials face their biggest challenge in months as they consider whether to continue raising interest rates this week to cool inflation or pause amid market turmoil fueled by recent bank failures.

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Before the collapse of Silicon Valley Bank and the subsequent decline, Fed policymakers were poised to raise interest rates by as much as 50 basis points after numerous reports indicated the economy was much stronger than officials thought at the start of the year.

Now, with financial markets in turmoil, many Fed watchers expect a smaller, quarter-point increase, and some say the U.S. central bank will stop altogether after the two-day meeting that begins on Tuesday.

The decision is a result of the European Central Bank’s 50-point interest rate hike on Thursday. President Christine Lagarde said the ECB remains committed to fighting inflation while closely monitoring bank tensions.

The Fed’s meeting is also expected to include an update to the summary of economic forecasts – a quarterly report that lays out participants’ forecasts for everything from inflation to interest rates – and a post-meeting press conference by Chairman Jerome Powell.

Amid turmoil in the banking sector, Powell is likely to face questions about the central bank’s oversight of SVB and other troubled entities.

He also needs to tread carefully when talking about the likely future path of interest rates. Before the banking problems emerged, Fed officials had signaled that interest rates should move above 5 percent this year and remain there until inflation is on pace to fall back to its 2 percent target.

Still, increased uncertainty about the extent to which bank capitalization problems — exacerbated by the Fed’s rapid rate hikes and the impact on Treasury yields — will affect the economy more broadly could limit Powell’s ability to tighten much more in the future.

What Bloomberg Economics Says…

“The FOMC faces its most challenging policy decision in recent memory on March 22. Market expectations have shifted sharply – from a 50-point hike to a pause – as fears of bank spreads override inflation concerns. We expect the Fed to hike 25 basis points and raise the cap from 4.75% to 5%. Accelerating inflation will maintain pressure to continue hiking.

– Anna Wong, US Chief Economist. For a full analysis, click here

Elsewhere, more than a dozen other central banks will set policy in the coming week. Economists predict rate hikes in the UK, Switzerland, Norway, Nigeria and the Philippines, while Brazil and Turkey are likely to hold off. Meanwhile, traders betting on the Bank of Canada’s rate path will get another inflation reading.

Click here to see what happened last week and below is a recap of what’s going on in the global economy.


China’s central bank reported on Monday that banks left prime lending rates unchanged as the economy gradually recovered.

A summary of opinions from the Bank of Japan’s meeting in Tokyo earlier this month sheds more light on the rationale for keeping monetary policy steady ahead of Kazuo Ueda’s takeover in April.

On Monday, Reserve Bank of Australia official Chris Kent may provide an update on the policy stance and any concerns about contagion in financial markets. These remarks are likely to prove more timely than Tuesday’s minutes of the RBA’s March meeting.

South Korea’s early trade numbers provide a pulse check on global conditions.

Japan’s inflation figures on Friday are set to reflect earlier data that pointed to a cooling in prices, helped in large part by new subsidized electricity bills.

The central banks of Hong Kong and Taiwan will announce their interest rates on Thursday.

Europe, Middle East, Africa

The Fed may be the dominant central bank decision this week, but there are plenty of others catching investors’ attention as well.

The Bank of England is a central position in Europe. Officials are expecting Britain’s latest inflation reading on Wednesday, possibly showing that price rises are still close to double digits. Most economists predict that interest rates will be raised by a quarter point the next day, although economic tensions will continue, a minority see no change.

Here is a brief summary of other upcoming decisions:

  • The Swiss National Bank’s meeting on Thursday is a quarterly meeting and there is still work to be done, so a rise of up to 50 basis points is widely expected. The result was overshadowed by Credit Suisse Group AG, the stricken bank provided a lifeline to help contain the global turmoil.

  • On the same day in Norway, where the authorities are predicted to raise interest rates by another quarter point to prolong the tightening cycle of monetary policy in the oil-rich economy.

  • Iceland will make a decision on Wednesday, and another big rate hike is possible.

Looking south, the central banks are also very active. Here’s a quick summary:

  • Nigeria may raise interest rates on Tuesday to curb inflation, which is near an 18-year high, and encourage investment.

  • In Angola, on the same day, officials may cut borrowing costs for the second time this year as the Kwanza remains stable, commodity prices are seen to be slowing and price growth volatility looks set to continue.

  • In Morocco, on the same day, the central bank is likely to suspend monetary policy tightening as food prices begin to fall.

  • And in Turkey on Thursday, the authorities are expected to keep interest rates steady. All signs of future politics are key as the country approaches elections in May that will see President Recep Tayyip Erdogan face his strongest challenge yet in two decades.

After Thursday’s ECB meeting, which ended with a half-pint rise but no future guidance, more than a dozen of its policymakers will speak in the coming days. President Lagarde is likely to draw the most attention when she testifies to the European Parliament on Monday.

More clues about the banking system’s background may be available when his ECB counterpart Andrea Enria, the eurozone’s top regulator, talks to the same panel of lawmakers the following day.

Lagarde is also among the officials taking the stage at the ECB and Its Watchers conference in Frankfurt on Wednesday, with several others scheduled to appear elsewhere during the week.

Meanwhile, euro zone and British purchasing managers’ indexes give indications of industrial strength as China reopens, and Germany’s Economic Council publishes updated growth outlooks.

Latin America

A busy week in Brazil begins with the central bank’s survey of the market’s inflation expectations, which will continue to remain above target until 2025.

Banco Central do Brasil will keep its key rate at 13.75 percent for the fifth consecutive meeting, although policymakers may strike a dovish tone in their post-decision statement.

After a slowdown in consumer prices in the middle of the past three months, analysts see a sharper slowdown in mid-February and the second quarter due to base effects before picking up in the second half.

Chile’s fourth-quarter output report may show the Andean country narrowly avoided falling into a technical recession, partly due to untapped household liquidity and the impact of China’s reopening.

In Argentina, four straight negative readings in its monthly economic activity indicator point to a quarterly contraction in output heading into a challenging 2023.

In Mexico, the weakness seen in retail sales since May is likely to continue into January, while a drop in demand from the US, the country’s largest export market, can be expected to weigh on January’s GDP revision data.

Initial consensus had mid-month inflation close to the lowest for the year – though still more than twice the 3 percent target – while the slightly stickier core reading continued to fall from November’s two-decade high of 8.66 percent. Banxico predicts.

— with assistance from Robert Jameson, Malcolm Scott, Sylvia Westall and Stephen Wicary.

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