The Federal Reserve building, in Washington, on March 23, 2022.PETE MAROVICH/The New York Times News Service
With the bulk of relevant economic data now in hand ahead of their policy meeting next week, U.S. central bankers are seen pressing on with their inflation-fighting campaign with a quarter-point interest-rate hike that just days ago looked possibly derailed by turmoil in the banking sector.
The move, which would bring the Fed’s benchmark rate to a 4.75 per cent-5 per cent range, would follow the European Central Bank’s decision on Thursday to stick with its own aggressive rate hike, as concern over high inflation outstripped fears of a global banking crisis.
After the ECB’s 50-basis point hike, traders of U.S. rate futures firmed up their bets that the U.S. central bank will raise interest rates by 25 basis points next week, and slashing the probability of a pause to about one chance in five.
An unexpected drop in U.S. jobless claims, which pointed to continued labor market strength, and stronger-than-expected housing data on Thursday also boosted trader bets on a Fed rate hike, as they suggest inflationary pressures are far from quelled by the tightening campaign to date.
The U.S. central bank has raised its benchmark overnight interest rate by 450 basis points since last March.
Other reports over the past week showed a still-strong labor market despite some cooling in wage growth, and consumer prices rising at a 6 per cent annual rate last month, slower than in January but still far higher than the Fed’s 2 per cent target.
Money markets have swung wildly in recent days amid a whirlwind of news suggesting rate hikes may have driven the banking sector to a breaking point, from the collapse of two large regional U.S. banks prompting emergency action from the Fed and other regulators, to Swiss regulators having to pledge assistance to Credit Suisse.
“The Fed will likely adopt a ‘dual track’ policy approach, similar to the ECB, distinguishing monetary policy from macro-prudential policy,” said Gregory Daco, chief economist at EY Parthenon, who also sees the U.S. central bank lifting borrowing costs by a quarter of a percentage point next week.
That said, traders no longer expect the Fed to accelerate the pace of its rate hikes to a 50-basis point increase at next week’s meeting, as they did a week ago after Fed Chair Jerome Powell signaled he and his colleagues were ready to hike faster and farther if the “totality” of the data suggested the need.
And they now are overwhelmingly pricing in the likelihood of interest-rate cuts starting in the summer, though since the ECB’s move they now see the Fed policy rate coming down less sharply.
The Fed will publish new projections for the rate hike path at the end of its March 21-22 meeting. Policymakers in December had seen rates rising to 5.1 per cent this year, with no rate cuts until 2024, and until the banking sector swoon traders had priced in an even higher top Fed policy rate.