Markets cannot be shielded from US Fed’s predicament
In the past week, the debate in financial markets has been whether the Fed would give precedence to the mess in the US banking industry or continued inflationary pressures while deciding on interest rates in the policy meeting ending March 22. The outcome of the Fed meeting–considered one of the most crucial in recent times– will set the tone for the markets in the near term.
While the European Central Bank last week raised policy rates by 50 basis points, refusing to buckle under pressure from the financial markets to go easy on rate tightening despite the troubles at Credit Suisse, several commentators are expecting the Fed to go a little easy to assuage Wall Street, which is increasingly growing anxious that a collapse in US banks could presage a repeat of the Global Financial Crisis of 2008. As against earlier expectations of a 50-basis point rate hike by the Fed this week, the market is now expecting 25 basis points. What investors are more concerned about is the monetary policy outlook: whether Fed chairperson Jerome Powell would signal that he is willing to tone down his battle against inflation to calm the market in the wake of the bank crisis. Or if he is determined to cement his reputation as the inflation warrior, like one of his legendary predecessors, Paul Volcker, withstanding the pressure from the markets. Just a week earlier, Powell had signalled the central bank could continue with rate hikes to tamp down persistent inflation.
“Ongoing financial sector stress poses a challenge to central banks, which still face strong inflation pressures,” said Barclays’ head of economic research Christian Keller. Central banks may have however come “very close” to veering towards “financial dominance” – a situation in which a central bank might refrain from policy tightening to prevent risking financial system stability, said Keller in a note.
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