The case for the US Federal Reserve to forgo an interest-rate hike strengthened in the eyes of some central bank watchers following a coordinated global move to ease growing financial strains.
Ahead of the weekend, most economists had been forecasting that the Fed would raise its benchmark rate by a quarter percentage point on Wednesday, to a range of 4.75 percent to 5 percent, extending a yearlong campaign to stamp out inflation.
On Sunday, however, the Fed and five other central banks announced action to boost liquidity in US dollar swap arrangements by increasing the frequency of access to daily from weekly — echoing actions taken during other moments of crisis.
Photo: Bloomberg
While US stock futures and treasury yields climbed in the initial hours of trading following Sunday’s news, and investors increased bets on a quarter-point hike, several analysts said the risk-benefit calculations around a pause were becoming more favorable to such an option.
“The fact that you are engaged in global coordination with other central banking authorities to rescue institutions and keep liquidity flowing, it just suggests that a pause is probably a better risk [for] reward,” said Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed economist.
The central bank could signal that its “intention right now is focused on stabilizing the liquidity in the banking system,” she said.
The latest news followed UBS Group AG’s agreement on Sunday to buy Credit Suisse Group AG in a government-brokered deal aimed at containing a crisis of confidence that threatened to spread across global markets.
It came on the heels of the collapse of three US lenders a week ago, developments that effectively took a 50 basis-point hike — something floated by US Federal Reserve Chairman Jerome Powell earlier in the month — off the table.
The Fed was joined by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank in announcing the coordinated action.
As Asian markets digested a frenetic weekend of global banking developments yesterday morning, equities dropped across the region. Additional tier-1 bonds issued by some Asian banks had a record fall during Asian trading hours. A Swiss regulator earlier said US$17 billion of such AT1s from Credit Suisse would be wiped out.
The decision on whether to pause or hike remains a tough call, and analysts were not immediately changing their predictions, so much as indicating that the chances of a pause seemed to have increased following Sunday’s developments.
The actions on Sunday “suggest greater worry about the left-tail risk from financial contagion, and on the margin could put [our presumption of] a rate hike by the FOMC on Wednesday in a bit more doubt,” former Fed governor Laurence Meyer and his colleagues at research firm Monetary Policy Analytics said in a note on Sunday night, referring to the Fed’s Federal Open Market Committee.
“The higher risk of pausing also suggests higher risk that the FOMC would revise downward or suspend balance sheet runoff, especially if policymakers think recent stress sends a definitive signal of reserve scarcity at the aggregate, systemic level rather than only at the level of individual banks,” they wrote.
Even as Fed officials signaled their intention to keep up the inflation fight by continuing rate hikes, market volatility over the next two days could set them off that course by tightening conditions for them.
“It’s a nuanced message, but hopefully monetary policy is the focus on inflation and all these other tools and measures to sort of stabilize the banking system are separate,” Brad Gibson, Melbourne-based AllianceBernstein head of Asia-Pacific fixed income, said on Bloomberg Television yesterday.
“It’s going to be a tough message to sell in a market like this,” he added.
Fed officials are to begin a two-day meeting today. With inflation holding firm and the labor market still hot early this year, some policymakers including Powell had suggested now might be appropriate to re-accelerate the pace of rate increases to a half-percentage-point hike from the 25-basis-point pace officials delivered the last time they met on Feb. 1.
That was before Silicon Valley Bank’s failure and the resulting market turmoil.
A 25 basis-point hike was “still our base case,” Evercore ISI analyst Krishna Guha, a former New York Fed employee, said in a note on Sunday. “But the FX swap flags US global concerns, and if we were to see a severe adverse reaction in European financials to the news, this could stop out a hike.”
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