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20 Mar 2023

Econ Digest

The FOMC meeting on March 21-22, 2023…The Fed is set to raise its policy rate by 0.25% and is also expected to signal the recent US bank collapses will not cause broader systemic woes

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        The US Federal Reserve (Fed) is expected to raise its policy rate by 0.25% to 4.75-5.00% at the Federal Open Market Committee (FOMC) meeting on March 21-22, 2023, after US inflation pulled back in February but remains elevated. However, amid concerns about news that some US banks faced liquidity problems and were shut down, the Fed would tend to give more consideration to financial market stability, and thus ease off on its aggressive moves. At the same time, it is more likely that the Fed will maintain its key interest rate at 5.00%. Following the closure of the troubled banks in the US, the market projects that the Fed may pause hiking the rate at the upcoming FOMC meeting. This is because further rate hikes would increase risks to the US banking sector. However, KResearch holds the view that if the Fed were to slow rate hikes, the move could cause financial market volatility. In particular, such an action could lead to heightened concerns that the Fed considers the bank closures a serious problem, and thus needs to hold rate rises despite persistently high inflationary pressure.

        In addition, at the upcoming FOMC meeting, the Fed is expected to signal that the impacts of recent US bank failures are still manageable and will not escalate to the point of causing extensive systemic problems in order to shore up confidence and minimize concerns in financial markets. However, as the Fed may focus more on risks to financial market stability, attention must be paid to its signal for further rate hikes, which remain highly uncertain. The future direction will depend on US financial market conditions, inflation and labour market figures, as well as the Fed’s outlook for the economy and inflation. The US central bank's recent aggressive rate hikes are among the factors that put pressure on the three US banks which faced liquidity problems and were shut down. As evidenced, the Fed's recent policy rate increases have begun to slow down the US economy. Thus, the likelihood that the US economy will enter a technical recession by the end of this year has become more apparent. If the Fed give more weight to economic risks and financial market stability, there is a chance that it would stop rate hikes sooner than expected, or even need to cut the policy rate this year.

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