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With the Federal Open Market Committee meeting on Wednesday and the recent financial problems facing the US banking system, White House press secretary Karine Jean-Pierre said President Joe Biden has “confidence” in Federal Reserve chairman Jerome Powell. Meanwhile, according to the CME Group’s Fedwatch tool, the target rate probability indicates that the Fed will raise the federal funds rate by 25 basis points (bps) this week. There is also a 26.9% chance the US central bank will not raise interest rates this month.
Market Laser Focus on Upcoming Fed Meeting; The Biden Administration Is Confident in Powell’s Leadership
It’s been a tumultuous week in the US banking industry as three major banks collapsed, and the Federal Reserve announced it would completely bail out two of them. In addition, the US central bank created the Bank Term Funding Program (BTFP) to help failing banks and their depositors. In addition, the Fed lent banks $164.8 billion to strengthen liquidity and teamed up on March 19 with five other major central banks to increase US dollar liquidity.
To make matters worse, a recently published paper showed that some 186 US banks were grappling with the same problem as Silicon Valley Bank, and First Republic Bank stock plummeted on March 20, losing more than 40% of its value in one day. Meanwhile, on March 22, the Federal Open Market Committee (FOMC) and Fed chair Jerome Powell will determine the fate of the federal funds rate.
Before the collapse of the banking industry, the US central bank had raised its benchmark interest rate rapidly every month since last year, following a significant monetary expansion in response to the Covid-19 pandemic, which kept interest rates pressed to zero. When inflation started to spike, members of the Fed, including chairman Powell, called it a “temporary” and predicted it would not last long.
However, the Fed’s rapid monetary tightening in response to inflation has caused significant problems with long-term Treasury notes. During a White House news briefing on Monday, press secretary Karine Jean-Pierre was asked about the president’s opinion on the Fed chairman’s leadership and whether Powell could be replaced as Fed chief. “No, not at all. The president has faith in Jerome Powell,” said Jean-Pierre.
Eight days earlier, on March 13, president Biden had assured Americans that the US banking system was safe. “Americans can rest assured that our banking system is secure,” he said. “Your deposit is safe. Let me also assure you that we are not stopping here. We will do whatever is necessary,” the US president added.
Additionally, market strategists and economists are curious about the Fed’s plans for Wednesday, with some speculating that the central bank will be dovish. For example, last week, Goldman Sachs chief economist Jan Hatzius revised his forecast for the US federal funds rate and stated that he did not expect a hike on Wednesday.
Other market analysts anticipate that the Fed will raise interest rates by 25 basis points (bps) this week. At the time of writing, the CME Group’s Fedwatch tool indicates a 73.1% chance that a 25bps rate increase will occur. The Fedwatch tool also shows that 26.9% of analysts expect no rate hikes this month.
What do you think of the Fed’s decision next Wednesday? Share your thoughts on this subject in the comments section below.
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