© Reuters
By Yasin Ebrahim
Investing.com -- Federal Reserve policymakers were close to pausing rate hikes last month, but ultimately decided that the banking system had stabilized enough to pursue further monetary policy tightening needed to dampen sticky inflation, the minutes of Fed's March meeting showed on Wednesday.
At the conclusion of its previous meeting on Mar. 22, the Federal Open Market Committee, or FOMC, raised its benchmark rate by 0.25% to a range of 4.75% to 5.00%.
In the days running up to the meeting, there was much market debate on whether the FOMC would pause to assess the fallout from the collapse of Silicon Valley Bank and Signature Bank (OTC:SBNY) just as banking troubles were brewing abroad with Credit Suisse, which was eventually sold to UBS.
The U.S. government and Fed, however, stepped in to shore up confidence in the banking system, easing worries about contagion.
The easing worries about contagion in the banking system and signs of ongoing inflation pressure ahead of the meeting, helped tilt the scale in favor of further hikes, though there was much deliberation among members on whether to pause rate hikes.
"Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this [March] meeting," according to the minutes from the Fed's Mar. 21-22 meeting showed.
Without the banking crisis, however, a return to a steeper 50-basis-point rate hike was on the table following data showing high inflation and strong economic growth.
"Some participants noted that given persistently high inflation and the strength of the recent economic data, they would have considered a 50 basis point increase in the target range to have been appropriate at this meeting in the absence of the recent developments in the banking sector," the minutes showed.
The Fed also kept its benchmark rate forecast unchanged from December, forecasting a terminal rate, or peak rate, of 5.1% in 2023, suggesting at least one more hike.
About 60% of traders expect the Fed to hike rates at its May 3 meeting, according to Investing.com’s Fed Rate Monitor Tool, with cuts also now expected before year-end.
At his March press conference, Fed Chairman Jerome Powell pushed back against a pivot, saying rate cuts weren’t Fed members’ “baseline expectations.”
But the Fed chief also said that further tightening in lending conditions could be a substitute for rate hikes, sparking debate on Wall Street whether the Fed’s reaction function would be hijacked by ebbs and flows of lending conditions.
“[W]e’re looking at what’s happening among the banks and asking, is there going to be some tightening in credit conditions?” Powell said at the Mar. 22 press conference. “We’re thinking about that as effectively doing the same thing that rate hikes do. So, in a way, that substitutes for rate hikes,” he added.
Recent data, however, showed that tightening of lending conditions has been less severe than many had feared.
“Overall, data on money market fund inflows, Fed lending and bank balance sheets show tentative signs of stabilization relative to a few weeks ago, but certainly do not give the ‘all-clear’ just yet,” Goldman Sachs said in a recent note.
We read at: Investing.com