The Fed is about to deliver a momentous policy decision. It'll be a choice between keeping the focus on inflation or stemming the banking chaos.
There is a crucial Fed decision looming today. It's the next big input for markets after weeks of turmoil that saw three US banks fail and a large European bank taken over in an emergency deal brokered by the government and regulators. All that while inflation is hovering at 6% on an annual basis here at home.
So, Powell and his colleagues have had a lot to digest, to say the least. Some of the earliest knee jerking has calmed markets and the most apocalyptic reactions have faded, as predictions of calamity become more sober estimations of "a bit more pain ahead, maybe."
Still, today's announcement from Powell will be key, not just for gauging the path of interest rates, but for shedding some light on how the central bank is thinking about the biggest banking crisis since 2008.
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1. What a difference a few weeks makes. Since the February 1 decision from the Fed to raise rates by 25 basis points, markets have been wracked by spasms of volatility, not from rate shocks this time, but from a spate of bank failures reminiscent of the last financial crisis.
If you think you've had a hard time dealing with the barrage of headlines, imagine how central bankers have been feeling. The initial reaction was that surely all of this means the Fed pauses rate hikes to avoid exacerbating the crisis, and Goldman Sachs said right after Silicon Valley Bank fell that markets should expect the Fed to hang tight this month.
A week or so later though and markets are thinking the odds are fairly locked for a definite increase of 25 basis points today, splitting the difference between those who say the Fed needs to back off and others who think 50 basis points would be the right move given where inflation is at. The CME FedWatch Tool on Tuesday afternoon was showing about an 85% chance the fed funds rate will be raised to quarter point to a target range of 4.50%-4.75%.
The thinking goes that the Fed pausing now would mean it is acknowledging that something is broken, and it could actually sow more panic, especially given that the crisis (which never did bear much resemblance to the 2008 crash anyway) seems to be ebbing.
The Fed's inflation fight will still be top of mind today most likely. At 6%, inflation in February remained uncomfortably high. Powell and the Fed may acknowledge that monetary policy has caused some pain, and even add that more may be coming. But drama at a few mid-sized banks probably won't distract them, especially after months of withering criticism that their late reaction to rising prices marked a grave policy error.
Sure, investors are still scared. In its survey of fund managers, Bank of America said that most respondents now consider a systemic credit event to be a bigger risk to the stock market than high inflation. US authorities though appeared bent on doing whatever it takes to stem the crisis, evidenced by Tuesday morning's speech from Treasury Secretary Janet Yellen, who said more aid could be provided to backstop deposits if needed.
Her assessment of the situation was that it appears to be "stabilizing." We'll see if Powell agrees.
What's your prediction for today's Fed decision and what Powell might say about the recent banking tumult? Email email@example.com to share your thoughts with me.
In other news:
2. The British pound jumped against the dollar Wednesday after new data showed a surprise flare-up in UK inflation last month. Traders have now locked in the probability of the Bank of England raising interest rates tomorrow. Read the full story.
3. Earnings on deck: Tsingtao Brewery, Tencent Holdings, and more, all reporting.
4. A market analyst says investors need to have some key questions answered by the Fed today. Market watchers should pay attention over whether the central bank sees the SVB collapse and resulting crisis as deflationary. Here are four things to listen for — and predictions for how stocks may react.
5. US home prices in February posted the first annual decline in a decade. The National Association of Realtors said that the 0.2% drop last month broke a 131-month streak of year-over-year gains. Here's what else is going on in the housing market.
6. Ron DeSantis does not like the idea of a Fed-issued digital dollar. The governor of Florida has proposed legislation to ban a central bank digital currency and has called on like-minded states to do the same. A CBDC, he argues, would promote "surveillance and control."
7. Here's what to know about the bonds that got wiped out in the Credit Suisse takeover. AT1s are a special debt instrument meant to shore up banks' capital positions in times of stress. The problem is that they can be written down to zero at investors' expense. Read on for more bond drama.
8. BMO shares its list of stocks investors can buy to profit from a simple investing strategy. Active fund managers are having their best year of performance in a decade, and for those stock pickers willing to navigate the volatility, there are some names to zero in on. Here 20 stocks BMO recommends to buy now.
9. Looking to buy a house? Here are some tips to make sure you're getting a good deal. According to economists at Redfin, there are pros and cons to wading into the housing market at this particular moment. Here are seven pieces of advice for mitigating the negatives and navigating the buying process.
10. Tesla bonds are no longer rated junk by Moody's. The ratings agency upgraded the credit rating of the EV maker for the first time, saying that Elon Musk's company has a dominant market position and its capital discipline has boosted its ability to repay debt. Check out what the ratings firm said this week.
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Edited by Jason Ma (email@example.com) in Los Angeles and Hallam Bullock (@hallam_bullock) in London.
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