SVB's liquidity crisis and Credit Suisse's potential bankruptcy could impact the Fed's decision.
In early March, Fed Chairman Jerome Powell made statements leaving open the possibility that the Fed would continue to raise interest rates at its March meeting if it felt it was necessary in the fight against inflation. This significantly impacted the forecasts of many financial institutions regarding the global economic situation.
However, the SVB bank's liquidity crisis, along with the impending bankruptcy of the Swiss bank Credit Suisse, which led to its sale to UBS for $3.2 billion, has somewhat prompted the Fed to reconsider and reassess its decision to continue raising the benchmark interest rate.
The Fed is facing a difficult choice: should it continue raising interest rates? (Photo: TL)
The decision on whether to raise the benchmark interest rate by another 0.25% will depend on the market's reaction to the merger between Credit Suisse and UBS. Since mid-2022, the Fed has continuously raised interest rates with the goal of curbing inflation, but the agency has not yet seen any significant crisis resulting from this interest rate hike policy.
William English, a former Fed economist and professor at Yale University's School of Management, said: "This will be a difficult decision because the Fed faces a lot of differing opinions."
Some central bank officials argue that lending and other financial conditions pose a greater risk than tightening due to the major shock in the banking industry. Others believe the impact of the event is not too significant and still support the Fed raising interest rates again to cool the economy.
Goldman Sachs economists have forecast that tightening lending standards would be equivalent to the Fed raising interest rates by around 0.25% to 0.5%.
Conflicting opinions within the Fed itself.
Even within the Fed itself, there are conflicting opinions on whether to continue raising the benchmark interest rate and by how many basis points.
Last November, New York Fed President John Williams stated: "Using monetary policy to mitigate vulnerabilities will be detrimental to the economy; monetary policy should be used to control activity."
One notable point is that recent statistics show that rising wages and prices remain a concern in the US. The downward trend in inflation seen in January and February has also ended. Therefore, some former US Fed officials still believe that the agency will raise interest rates by around 25 basis points if the credit crisis in the banking sector is not too severe.
Meanwhile, some former policymakers argue there are compelling reasons for the Fed not to raise interest rates. Eric Rosengren, former president of the Boston Fed, stated: "I wouldn't add fuel to the fire by raising interest rates while shocks are happening. A 0.25% increase would have little impact on inflation but a significant impact on financial conditions."
Similarly, Dallas Fed President Lorie Logan also subtly hinted at this : "When walking and encountering bad weather or a dangerous stretch of road, you should slow down."
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