(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 take a break amid market turmoil fueled by the recent bank crash.
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Before the collapse of Silicon Valley Bank and the ensuing fallout, Fed policymakers were poised to raise interest rates by as much as 50 basis points after a slew of data suggested the economy was much stronger than officials thought at the start of the year .
Now, given financial market volatility, many Fed watchers expect a smaller quarter-point hike, and some say the central bank will stop altogether after a two-day meeting starting on Tuesday.
The decision follows an interest rate hike of 50 basis points by the European Central Bank on Thursday. President Christine Lagarde said the ECB remains committed to fighting inflation while closely monitoring banking tensions.
Also highly anticipated from the Fed meeting, with an update to the summary of economic projections — a quarterly report that lays out participants’ forecasts for everything from inflation to interest rates — and Chairman Jerome Powell’s post-meeting news conference.
Amid banking sector turmoil, Powell is likely to face questions about the central bank’s oversight of SVB and other struggling entities.
He will also have to tread carefully when talking about the likely future path of interest rates. Before the banking problems emerged, Fed officials had indicated that interest rates should move above 5% this year and remain there until inflation was on track to fall back to their 2% 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 broader economy could limit Powell’s ability to tighten much more going forward.
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 basis point hike to a pause — as fears of bank contagion crowd out inflation concerns. We expect the Fed to raise 25 basis points , taking the upper bound from 4.75% to 5%. Reaccelerating inflation maintains pressure to continue hiking.”
– Anna Wong, Chief Economist in the US. For full analysis, click here
Elsewhere, 12 other central banks 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. Meanwhile, traders betting on the Bank of Canada’s rate path will get a new inflation reading.
Click here for what happened last week and below is our wrap of what’s coming up in the global economy.
On Monday, the People’s Bank of China is likely to report that banks left their prime rates unchanged as the economy gradually recovers.
In Tokyo, a summary of statements from the Bank of Japan’s meeting earlier this month will shed more light on the rationale for keeping monetary policy steady ahead of Kazuo Ueda’s arrival at the helm in April.
Reserve Bank of Australia official Chris Kent can on Monday give an updated take on the political stance and any concerns about contagion on the financial market. These remarks are likely to prove more timely than Tuesday’s minutes from the RBA’s March meeting.
Early trade numbers from South Korea will provide a pulse check on global conditions.
Japan’s inflation figures on Friday are set to mirror earlier data that pointed to a fall in prices, helped largely by newly 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 several others will also attract investors’ attention.
The Bank of England is at the center of Europe. Officials await the latest UK inflation reading on Wednesday, which may show price growth is still close to double digits. Most economists predict rates will be raised by a quarter of a point the next day, although economic tensions remain simmering, a minority see no change.
Here’s a quick rundown of the other decisions that need to be made:
The Swiss National Bank meeting on Thursday is a quarterly meeting and must catch up, so a rise of as much as 50 basis points is widely expected. Credit Suisse Group AG overshadows the result, the stricken bank offered a lifeline to help contain the global turmoil.
The same day in Norway, where officials are expected to raise interest rates by another quarter of a point to extend the monetary tightening cycle in the oil-rich economy.
An Icelandic decision is expected on Wednesday, with another big rate hike possible.
Looking south, the central banks will also be very active. Here’s a quick overview:
Nigeria may raise interest rates on Tuesday to curb inflation, which is near an 18-year high, and to encourage investment.
In Angola on the same day, officials may cut benchmark borrowing costs for the second time this year as the kwanza remains stable, commodity prices are seen easing and a downward swing in price growth looks set to continue.
In Morocco that day, the central bank will most likely pause monetary tightening as food prices begin to ease.
And in Turkey on Thursday, officials are expected to keep interest rates steady. Any sign of future policy will be key as the country heads to elections in May, with President Recep Tayyip Erdogan facing the biggest challenge yet to his two decades in power.
After the ECB’s meeting on Thursday, which ended with a half-pint hike but no future guidance, more than a dozen of its policymakers will speak in the coming days. President Lagarde is likely to attract the most attention with testimony to the European Parliament on Monday.
Further clues about the background of the banking system may be available when her ECB counterpart Andrea Enria, the eurozone’s top regulator, speaks to the same panel of lawmakers the following day.
Lagarde is also among officials who will take 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 UK purchasing managers’ indexes will give an indication of industry strength as China reopens, and the German Council of Economic Experts will publish an updated growth outlook.
A busy week in Brazil begins with the central bank’s survey of market expectations for inflation, which continues to rise further above target through 2025.
The Banco Central do Brasil is almost certain to keep its key rate at 13.75% for a fifth consecutive meeting, although policymakers may strike a dovish tone in the post-decision statement.
After minimal disinflation over the past three mid-month consumer price readings, analysts see a steeper deceleration for the print in mid-February and into the second quarter due to base effects, before a pick-up in the second half of the year.
Chile’s fourth-quarter manufacturing report may show the Andean country avoided falling into a technical recession with tight conditions, in part due to untapped household liquidity and the impact of China’s reopening.
In Argentina, four straight negative readings on its monthly economic activity indicator point to a quarterly decline in output heading into a challenging 2023.
In Mexico, the weakness seen in retail sales since May is likely to extend into January, while falling demand from the US, the country’s biggest export market, is expected to weigh on January GDP proxy data.
The early consensus has mid-month inflation nearing a one-year low – though still more than double the 3% target – while the somewhat stickier core reading extends a decline from November’s two-decade high of 8, 66% in line with Banxico forecasts.
–With assistance from Robert Jameson, Malcolm Scott, Sylvia Westall and Stephen Wicary.
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