While persistently high prices might make the Federal Reserve favorable to more interest rate hikes, some experts doubt this will happen given recent happenings in the banking sector.
As The Dallas Express recently reported, inflation eased to 6% in February — far from the Fed’s target of 2%. According to the U.S. Bureau of Labor Statistics, core prices, which exclude food and energy, increased by 0.5% that same month.
Although these increasing prices are likely to contribute to the Fed’s continued rate hikes, the collapse of two major banks last week might change things.
Silicon Valley Bank and Signature Bank failed at tremendous speeds after a bank run by its customers. Both financial institutions are now being scrutinized by federal regulators, per USA Today.
In light of the effect higher interest rates are having on the banking sector, economists are divided on the right course of action.
Some are expecting the Fed to decide at its next meeting on March 21-22 to halt interest rate hikes in favor of focusing on the stability of the financial system.
Jan Hatzius, a chief economist at Goldman Sachs, said per WFAA that his firm believes the Fed will leave interest rates alone in favor of stabilizing the banking sector and the stock market. Goldman Sachs was previously projecting a 25 basis point increase.
“We would be surprised if, just one week after going to great lengths to support financial stability, policymakers risked undermining their efforts by raising interest rates again,” Hatzius said in an analyst note on March 13, according to WFAA.
If Goldman Sachs and others are correct, this would be a marked shift in sentiment.
Just a week ago, Fed Chairman Jerome Powell suggested during a Senate committee that he would raise the benchmark interest rate by half a point if inflation didn’t ease, WFAA reported.
At the same time, if the Fed does decide to press pause on the interest rate hikes, it likely won’t be for long.
Hatzius said, per CNBC, that if his predictions are correct, he still expects the central bank to resume rate increases at its next meeting in May until reaching a terminal rate of 5.25% to 5.5%.
On March 13, after noting the financial difficulties many Americans will face if a recession strikes, Rep. Ayanna Pressley (D-MA) asked Powell about rate hikes directly.
“Respectfully, will you pause future interest rate hikes — yes or no?” Pressley inquired, per Forbes.
Powell responded, “I don’t do yes or no on whether I will pause interest rate hikes.”
“That’s a serious question, and I can’t tell you because I don’t have all the facts. That’s not a possibility,” he added.
Steve Hanke, professor of applied economics at Johns Hopkins University, was interviewed by David Lin the other day. Hanke was spot-on about inflation and solutions. He has the experience of turning things around. M-2 (money supply) is something which people should wake up to knowing something about.