Five questions that the Fed may have to answer in the midst of the banking crisis

This week, the authorities of the Fed (Federal Reserve) will declare for the first time since the collapse of Silicon Valley Bank and Signature Bank, the sale of Credit Suisse and the extended life line of the First Republic. A grande questão é o que eles farão to follow.

An announcement of the basic tax rate is expected at this fourth fair, together with new economic projections, and the president of the Federal Reserve, Jerome Powell, will face the press to answer questions.

Powell has no easy task ahead. Here are five big quests that he will probably face.

Is the Fed’s fight against inflation destabilizing the banking system?

The US banking system is under a lot of pressure now. This occurs in part because increases in the Federal Reserve will undermine the value of two Treasury securities and other securities, a critical source of capital for most American banks.

When Silicon Valley Bank was forced to sell these securities quickly with a substantial loss, the bank entered a liquidity crisis and collapsed.

This is the Fed’s fight against still-rigid inflation that will further destabilize the banks and how the central bank is analyzing this possible trade-off.

Is the economy starting to fail?

A good news to all, wrote to JPMorgan’s chief global strategist, David Kelly, in a second-fair note, is that inflation seems to be on a well-established downward trajectory. The news “is more open to the Fed than the potential to worsen financial instability, threatening the economy with recession”.

The reduction in inflation is expensive and creates economic damage and “cracks in the financial system”, BlackRock analysts wrote in a note on the second fair. “The events of this week will harm bank loans, reinforcing our vision of recession”, they added.

The collapse of the banking sector certainly exposes a streak in the financial sector. Investors will wonder exactly how deep that slump is and whether it could spill over to other parts of the economy.

The Federal Reserve’s economic forecasts will include forecasts for unemployment and economic growth – showing whether policymakers are selling those streaks, too.

Did the European Central Bank make the right decision?

The president of the European Central Bank, Christine Lagarde, announced an aggressive increase in the mid-point tax rate on the last fifth fair, a few hours after Credit Suisse agreed to a loan of US$ 53.7 billion to help maintain itself.

Lagarde chose to portray this tax increase as a sign that the financial system continues to be strong. The central bank has the tools, if necessary, to respond to a liquidity crisis, “but this is not what we are selling,” he told reporters.

In a speech at the second fair, Lagarde doubled the pressure and said that banks in the euro zone have “very limited exposure” to Credit Suisse. “We are not talking about billions, we are talking about thousands”, he stressed.

The ECB’s position can open the door for an aggressive Fed hike at the fourth fair.

Investors will be watching to see if Powell engages in that ECB messaging tactic: carefully distinguishing his campaign to fight inflation from his work to counter problems with the financial system.

Do the dice justify a pause or increase in juros?

The continued chaos of the banking sector has led some economists and analysts to call for a moratorium on tax increases until the sector is resolved.

Goldman Sachs analysts wrote in a report at the second fair that “while policymakers have responded aggressively to strengthen the financial system, markets seem not to be fully convinced that efforts to support small and medium banks will be enough.”

Either Goldman anticipates that the Fed will pause its pledge hikes for less than a while.

“It does not make sense to open up monetary policy in the midst of the continuous stress in the banking system that can present a substantial risk of curfew for the economy,” wrote the team, led by chief economist Jan Hatzius.

“Dealing with the stress in the banking system is the most immediate concern and should take precedence over other less urgent goals at this time.”

At the same time, inflation remains well above the central bank’s target of 2%, economic data continues to show the strength of the labor market and the resilience of two consumer spending, and the Fed authorities will signal their intention to open monetary policy aggressively Até that the price increases decrease.

Wall Street is currently pricing in a roughly 75% chance of a quarter-percentage point gain this quarter, according to CME FedWatch data.

Or will money end?

The Federal Reserve launched the Emergency Bank Term Funding Program, supported by US$25 billion from the US Treasury in response to the collapse of SVB and Signature Bank.

Right now, the banks are doing good use disso. The most recent dice, from the last fifth-fair, show that the banks have already borrowed quase metade desse lastro guaranteed, or US$ 11.9 billion.