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Five Ways Banking Turmoil Will Impact the Fed’s Decision

The Marriner S. Eccles Federal Reserve building in Washington, DC, US, on Monday, March 13, 2023. 

The Marriner S. Eccles Federal Reserve building in Washington, DC, US, on Monday, March 13, 2023. 

Photographer: Al Drago/Bloomberg

The Federal Reserve is meeting this week to decide its next step on interest rates just as its yearlong fight against inflation is colliding with a crunch in the financial sector. The Fed’s next move will be closely watched as recent bank failures are stirring memories of the 2008 financial crisis. Even before the central bank policy decision on Wednesday, investors will be looking for more signs of stress in the global banking industry and additional steps from regulators to provide relief. This is a special edition newsletter we’re sending to subscribers of  Five Things  and  New Economy Daily  to give an overview of what we're watching ahead of the meeting.

There is no shortage of views among investors with expectations shifting between the Fed delivering another quarter-point hike and a pause. The only certainty is that the Fed will refrain from a bigger half-point hike that Chair Jerome Powell had put on the table just before concerns about financial stability emerged. A survey of economists by Bloomberg News shows a median call of a quarter point hike that will take the Fed’s policy rate to a range of 4.75%-5% and the bond market assigns about a 65% chance to that possibility. At the height of bank stress concerns last week, traders lowered the odds of a quarter point hike to less than half while some banks, including Goldman Sachs and Barclays, changed their rate calls and they now don’t expect a rate hike.

As developments are changing rapidly, amid efforts to support troubled lenders from Credit Suisse to First Republic, rate-hike expectations could shift yet again before Wednesday. The Fed is very unlikely to challenge markets with a surprise move after bond volatility surged to the highest since 2008. Fears of a broader credit crunch and signs of liquidity strains will also be top concerns for policy makers. In the past week, banks scrambling for cash already drew a record amount of funds from the Fed’s emergency facilities, including a new funding backstop, eclipsing a previous record set in the 2008 financial crisis.