How will the recent banking drama affect Federal Reserve policy?

How will bank failures affect Federal Reserve policy?

Prior to the collapse of Silicon Valley Bank more than a week ago, investors were betting that the US Federal Reserve would raise interest rates by 0.5 percentage points at its March meeting, forced to pick up the pace of tightening after recent strong jobs and inflation data.

But the Fed’s outlook is no longer so clear. The drama in parts of the US banking system has shown investors that the central bank has finished or is about to finish tightening monetary policy. While banking problems have little to do with inflation, a move to a more aggressive policy could lead to panic in the markets and new problems with banks, which, in turn, will require further intervention from the Fed.

Pricing in the futures market currently suggests that most investors expect the Fed to raise rates by 0.25 percentage points at meetings on Tuesday and Wednesday. However, these expectations were rapidly changing, and at the beginning of this week, the chances of any increase at all were close to zero.

The meeting came after inflation data showed that consumer prices continued to decline in February, although the improvement was less than economists had expected. The consumer price index rose 6% in February compared to the same period last year, while core inflation, excluding volatility in the food and energy sectors, rose 5.5%. Keith Dugid

In what direction will the “knife” decision of the Bank of England go?

Economists say the next Bank of England monetary policy decision, taken on Thursday, will be ‘nail-biting’. Gov. Andrew Bailey has already opened the door for a pause in policy rate hikes, but inflation remains stubbornly high.

Markets priced almost equally likely to increase by 0.25 percentage points and remain unchanged.

The Bank of England has raised the discount rate at every meeting since November 2021, when the base rate was at an all-time low of 0.1%, to the current rate of 4%.

The economy is feeling the impact of rising borrowing costs and the cost of living crisis, contracting in the third quarter and stagnating in the last three months of 2022. concerns about the impact of rising borrowing costs on the banking sector and activities.

However, inflation is still in double digits and the labor market remains tight, fueling economists’ fears of more prolonged price pressure.

Elizabeth Martins, an economist at HSBC, said the move was “not easy, but overall we think the BoE will push and raise rates to 4.25%.”

She added that the UK inflation data for February, which will be released on Wednesday, the day before the policy meeting, could still affect the outcome of the vote. Weak price pressure will incline the decision to abandon the changes.

“Whether the Bank rises next week or not, we think it is nearing the end of its tightening, at least for now,” Martins added. Valentina Romey

Will the Eurozone economy survive?

The eurozone economy is expected to show further resilience in the face of the cost-of-living crisis, with a leading business review forecasting continued growth in activity in March.

Economists polled by Reuters expect the eurozone’s composite purchasing managers’ index, which is a barometer of private sector activity, to hit 52 in March. This will not change from February and will exceed 50, indicating that most businesses are reporting an expansion from the previous month.

Friday’s PMIs are expected to show that growth in the euro area was driven by services, with the sector’s index expected to come in at 52.6, almost unchanged from the previous month. Production, which was heavily impacted by high energy prices, is forecast to continue to decline, but marginally better than the previous month.

Ryan Jajasaputra, an economist at Investec, said that in February the eurozone PMI showed an improvement in confidence, rising demand in the services sector and continued easing of pressure in the supply chain. He expects that “this trend will continue in March.”

This will be in line with expectations of an improvement in the outlook for the activity of the European Central Bank.

“It looks like the economy will bounce back in the coming quarters,” ECB President Christine Lagarde said at a press conference on Thursday after announcing a 0.5 percentage point hike in deposit interest rates.

“Industrial production should pick up as supply conditions continue to improve, confidence continues to rebuild, and firms are clearing large backlogs,” she said. “Rising wages and falling energy prices are partly offsetting the loss in purchasing power that many households face as a result of high inflation.” Valentina Romey