The Federal Open Market Committee meets next week, at which time it is expected to raise its benchmark interest rate another 50 basis points, to a range of 4.75% to 5.00%, if we correctly interpret Fed Chair Jerome Powell’s testimony to Congress last week, when he said “the ultimate level of interest rates is likely to be higher than previously anticipated.”
Before that, the market had expected a 25-basis point increase, equivalent to its most recent hike at the Jan. 31-February 1 meeting. As we know, his comments sent stock and bond prices sharply lower.
Since then, though, we’ve had some serious news coming out of the banking system, namely the failure of SVB Bank and the closure of Silvergate Capital (both regulated by the Fed!) and worries that some of the largest U.S. banks (also regulated by the Fed) are sitting on some huge, unrealized losses in their government bond portfolios.
In this atmosphere, is a larger than expected rate increase next week—i.e., 50 bps rather than 25—justified?
Or should the Fed maybe show a little restraint and raise the fed funds rate only a quarter point?
And if it does, what will be the likely market reaction?
In his Capitol Hill testimony, Powell focused – as you would expect – on the U.S. economy, namely its stronger than expected recent performance, particularly in the jobs market, which in February gained another 311,000 jobs even as the unemployment rate rose slightly to 3.6%.
The Fed seems hellbent on making up for its past errors of overly long, overly loose monetary policy by ramming through rate increases no matter how much harm they might cause.
Ignoring the second component of its Congressional mandate, namely promoting full employment, the Fed is instead totally focused on slaying inflation as fast as possible, even though getting from the current rate of inflation – 6.4% in January — back down to its 2% target will no doubt take some time.
After all, the Fed only started raising interest rates back in March 2022, when the fed funds rate was at or near zero. Continue reading "What Will The Fed Do In March?"