WASHINGTON- The Federal Reserve is expected to raise interest rates by a quarter of a percentage point on Wednesday, a decision that will land amid a brewing political storm over the US central bank’s oversight of collapsed Silicon Valley Bank and with the financial world hanging on the words of one man: Jerome Powell.
In the second institutional crisis faced by Powell during his five-year tenure as Fed chief, SVB’s March 10 failure has drawn scrutiny across the political spectrum, with calls to reform the central bank’s governance and oversight reminiscent of what happened after a furor over Fed officials’ stock trading erupted in 2021.
Two of the Fed’s 12 regional bank presidents resigned as a result of that scandal and Powell launched a fast overhaul of the central bank’s ethics rules as criticism mounted.
Similarly, Powell recently said the failure of California-based SVB warranted “a thorough, transparent, and swift review” of how the Fed supervised the nation’s 16th largest bank, an institution with little profile on Main Street until its troubles rocked confidence in other mid-sized lenders who are important providers of business and consumer credit.
The sudden threat of financial instability stemming from a Fed-supervised institution has complicated monetary policy decisions that had been tightly focused on raising interest rates to fight inflation, and raised the stakes for Powell in explaining the outcome of this week’s meeting and the Fed’s response to the SVB collapse.
As policymakers kicked off their latest Federal Open Market Committee meeting, US Senator Rick Scott, a Republican and possible 2024 presidential candidate, demanded in a letter to Powell that the Fed chief address the “failures and malfeasance” behind the collapse of SVB and another US lender, Signature Bank, and “name the individual(s) being fired.”
Similar criticism has come from the left, with Democratic US Senator Elizabeth Warren, a longtime Powell opponent, saying she had lost confidence as well in San Francisco Fed President Mary Daly, whose bank was responsible for supervising SVB.
The Fed has said its review of SVB’s supervision will be finished by May 1 and released to the public.
Still, turbulence in financial markets and the banking system is likely to feature prominently in Powell’s post-meeting news conference. The US central bank will release its policy statement and new economic projections from Fed officials today.
Banking stocks that lost roughly 20 percent of their value over two turbulent weeks appeared as of Tuesday to have found some footing in the wake of the Fed’s latest maneuver on a Sunday evening to restore confidence in the financial system.
Yields on Treasury securities that had plummeted in a flight-to-safety by investors have also clawed back some of that ground. Everything Powell says – and how he says it – could determine if that nascent calm holds.
Market expectations are tilted heavily towards the Fed approving another quarter-of-a-percentage-point rate increase, which would lift its benchmark overnight interest rate – the federal funds rate – to the 4.75 percent-5.00 percent range. The rate increases are meant to slow spending on goods and services and lower inflation back toward its annual 2 percent target from a level more than double that.
Less clear, and arguably more important, is how a new policy statement assesses the risks to the economy posed by the recent trouble in banking markets, how it characterizes the likely need for further rate increases, and how high officials think the target interest rate will rise by the end of this year.
As of December, Fed policymakers thought the fed funds rate might stop between 5.00 percent and 5.25 percent, but higher-than-expected inflation had led Powell to indicate the stopping point might be even higher. – Reuters
