The powerful Fed faces a difficult trade-off: should it continue to raise its key interest rate to curb persistently high inflation, or pause to avoid worsening banks' difficulties?
"The near-death experience of the banking industry over the past two weeks should make Fed officials more measured," said Steve Englander, an economist at Standard Chartered and a former economist at the Fed.
The assumption of a moderate increase, of a quarter of a percentage point, or 25 basis points, thus far outweighs among market participants, according to CME Group's assessment.
Expectations had gone on a rollercoaster, going from a sharp rise of half a percentage point (50 basis points) after the Fed chairman's comments on inflation to zero in a few days when the mini-banking crisis began.
The failures of the US regional banks Silicon Valley Bank (SVB), Signature Bank and Silverline have created a wave of concern in the banking sector and in global markets. Governments, central banks and regulators have intervened urgently to try to restore confidence, the best weapon to avoid contagion at all costs.
But the Swiss bank Credit Suisse, already in difficulty for years, paid the price, and was bought Sunday urgently by its compatriot UBS.
Calm, however, appeared to return on Tuesday. European stock markets closed on a second consecutive rebound, and on Wall Street, which also ended in the green, it was even the banking sector that led the rise in the market. The American bank First Republic has soared by almost 30%.
"The pressure on banking sector stocks seems to be easing after regulators' actions to restore confidence," said Rubeela Farooqi, chief economist for HFE, who did not rule out the risk of "fear of new bankruptcies and a risk of contagion".
The key rate of the Fed © Patricio ARANA / AFP
The Fed meeting began Tuesday morning and will end at midday Wednesday. A press release will be issued at 14:00 (18:00 GMT) and then the institution's chairman, Jerome Powell, will hold a press conference at 14:30 (18:30 GMT).
Jerome Powell "will recognize the risks to the banking sector, but will argue that the threat is contained," said Ian Shepherdson, chief economist for Pantheon Macreconomics.
For him, however, "any rate hike today is a mistake," because "the Fed has done enough to bring inflation back to target, and we can't be sure that the threats to the banking system have passed."
Like the ECB?
Especially since the fall of these banks was driven by the Fed's rate hikes, which rose at a pace not seen since the early 1980s, during the episode of very high inflation that the United States had then experienced.
Rates were between 0 and 0.25% a year ago, but are now between 4.50 and 4.75%.
The Fed will also update its economic forecasts, in terms of GDP growth, unemployment and inflation, and officials will say how far they see rates rising.
The US central bank is all the more under pressure as its European counterpart, the ECB, raised rates by 0.50 points on Thursday, assuring that it would not compromise between price stability and financial stability.
The Fed lent some $164 billion to U.S. banks in a matter of days, so that all customers who wanted to withdraw their money could do so, as well as $142.8 billion to the two entities created by U.S. regulators to succeed SVB and Signature Bank.
Contrary to the Fed's fight against inflation, these loans have increased its balance sheet by $297 billion, which it had been trying to reduce since June. It had bought securities during the Covid-19 pandemic to flood the market with liquidity and allow it to continue operating.
© 2023 AFP