The American central bank (Fed) began its meeting on Tuesday in the midst of turbulence in the banking sector and will have to arbitrate between a rate hike to fight inflation and a break in the face of fears of a financial crisis.
The meeting of the monetary policy committee (FOMC) began at 10:00 a.m. (2:00 p.m. GMT) as scheduled, a spokesman for the central bank told AFP.
Powerful Federal Reserve officials warned two weeks ago that rates, which are currently between 4.50 and 4.75%, could rise more than expected in the face of inflation that remains too high. But since then, the banking sector has been plunged into crisis by the fall of Silicon Valley Bank (SVB).
The FMOC will tackle a difficult task this week, with economic data pushing in one direction while conditions in financial markets trend the opposite, summarizes Ryan Sweet, chief economist for Oxford Economics.
A moderate increase expected
Three options are available to the Fed: a sharp hike in rates, by half a percentage point, a more moderate hike of a quarter of a point – as at the previous meeting – or a pause. The markets are mostly anticipating an increase of a quarter of a point, or 25 basis points.
The decision will be announced in a press release on Wednesday and will be followed by a press conference by the president of the institution, Jerome Powell. And his remarks are dissected by observers. The Fed will have to stress that its dual mandate is to achieve full employment and price stability, the latter of which is far from being achieved, but will also have to highlight the tools available to help reduce tensions in the banking system, stresses Ryan Sweet again.
Because the Fed has lent hundreds of billions of dollars to American banks over the past week, boosting a balance sheet that it had been trying to reduce for a year and a half, in order to curb inflation.
And, like every three months or so (every other meeting), the Fed will update its economic forecasts for GDP growth, inflation, and unemployment. Bank officials will also say how far they expect to have to raise rates and when it will be appropriate to start lowering them.