The United States Federal Reserve (Fed, central bank) will have to solve a dilemma this week between raising interest rates and potentially fueling the banking crisis, or keeping them at their current level at the risk of moderating their fight against inflation.
"The US economic data, on the labor market and inflation, support a rise of 25 basis points" of the reference rate, a quarter of a percentage point, says Rubeela Farooqi, an economist at HFE.
The market is wondering if the Fed will proceed with that contained increase, a stronger half-point increase, or if, instead, it will keep interest rates at the end of its policy meeting on Wednesday.
One of The main functions of the Fed is to control inflation, which remains high and erodes the purchasing power of Americans. Interest rates are its main tool to combat rising prices: by raising them, the agency makes credit for consumption and investment more expensive, thus discouraging demand, to cool the economy.
The president of the Central Bank, Jerome Powell, anticipated two weeks ago a greater and faster increase in rates than had been expected until then.
But the context mutated: three US banks failed, including Silicon Valley Bank (SVB), in the biggest banking debacle in the United States since the 2008 financial crisis. Authorities intervened amid a crisis that spread and on Sunday, Swiss bank UBS bought struggling Credit Suisse, also of Switzerland.
"Recent events have completely changed the landscape." and the fed "must act prudently" to avoid putting more banks in jeopardy, Michael Gapen, chief economist at Bank of America, said in a note.
loans to banks
Those responsible for the Fed will have an important dilemma to resolve and "they will have to find a balance between concerns for financial stability and concerns linked to inflation", summed up Nathan Sheets, chief economist at Citigroup Global, in statements to AFP.
The fall of these banks was driven to a large extent by the increase in rates decided by the Fed, at an unprecedented pace since the early 1980s. When a year ago the rates were 0-0.25% to stimulate consumption weighed down by the pandemic, now the reference rates are located at 4.50-4.75%.
This rate increases exposed banks to a reduction in the value of some of their assets.
The Fed lent $12 billion to banks between Sunday and Wednesday of last week thanks to a new program specifically designed for this moment and designed to support them in honoring their clients’ withdrawal demands.
Very short-term loans, usual, went from 5,000 million to 152,000 million in one week. The Fed lent $142.8 billion just to two entities created by regulators to succeed SVB and Signature Bank, a New York bank closed on March 12 by regulators.
These loans increased its balance sheet by $297 billion, which it had been trying to reduce since June after buying securities during the pandemic to flood the market with liquidity and avoid a collapse.
This data could weigh on his decision since injecting liquidity into the economy goes precisely against his main objective, which is to lower inflation.
ECB signal?
The Fed is even more under pressure after its European counterpart, the ECB, raised its rates by 0.50% last Thursday.
"Should we see a signal for the Fed in that ECB decision?"wonders Rubeela Farooqi.
The OECD, for its part, insisted on Friday that it is necessary for central banks to "maintain a high rate policy until 2024 at least".
Inflation measured by consumer prices remained high in February in the United States, at 6%, far from the 2% to which the Fed wants to return it.
On Wednesday, following a two-day meeting, the Fed will also release its updated economic forecasts for GDP, unemployment and inflation.