Federal Reserve set for pivotal decision on rate rises amid bank turmoil

The US Federal Reserve is on Wednesday set to make a pivotal decision on whether to press ahead with its monetary tightening campaign or pause interest rate rises in the face of the worst banking turmoil since the 2008 financial crisis.

The rate decision will be announced at 2pm Eastern time on Wednesday following the conclusion of the Federal Open Market Committee’s two-day meeting, after which Fed chair Jay Powell will hold a press conference.

In a sign of how much the government takeover of two failing banks has altered the Fed’s calculus, policymakers are debating whether to raise rates by a quarter point or not at all. At the start of the month, Powell had floated the idea of the Fed accelerating the pace of rate rises back to a half-point increase.

The interest rate decision will be accompanied by a revised set of projections about the path forward for monetary policy through to 2025, as well as forecasts for growth, unemployment and inflation.

The US central bank last published officials’ estimates in December, when most thought the federal funds rate would peak at 5 per cent to 5.25 per cent. At present it hovers at 4.50 per cent to 4.75 per cent, following a return to more traditional quarter-point rises in February after months of larger increases.

Another quarter-point move on Wednesday would lift the funds rate to a new target range of 4.75 per cent to 5 per cent.

The debate over the Fed’s next move comes as officials face acute uncertainty over the economic outlook following the implosion of Silicon Valley Bank and Signature Bank earlier this month.

In an attempt to stem contagion among midsized lenders, the central bank — alongside the Treasury and the Federal Deposit Insurance Corporation — intervened aggressively, guaranteeing the deposits of the two failed banks. The Fed also rolled out an emergency facility to aid lenders more broadly.

Treasury secretary Janet Yellen on Tuesday said authorities were prepared to take further steps to shore up the financial system if necessary, including extending government guarantees to more small lenders.

Her comments followed an announcement on Sunday from the Fed and five other leading central banks that they would move to improve access to US dollar liquidity after UBS’s forced takeover of Credit Suisse brokered by Swiss officials last weekend.

Complicating the Fed’s decision is the lack of clarity on whether global authorities have done enough to save the banking system from further contagion, and on how severe the economic shock will be from the retreat of midsized lenders.

Those in favour of a pause argue the central bank could further unsettle an already unstable situation by ploughing ahead with another rate rise, and that the coming credit crunch could spell a deeper recession ahead.

However, proponents of further rate rises say economic conditions do not at present warrant a pause, especially following the strong labour market and inflation data published since the February policy meeting.