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Markets around the world turn to Federal Reserve for US interest rate decision

Hands up for rate hike -- Jerome Powell’s Federal Reserve is expected to lift rates by 0.25% tonight   (AFP/Getty Images)
Hands up for rate hike -- Jerome Powell’s Federal Reserve is expected to lift rates by 0.25% tonight (AFP/Getty Images)

The world’s most influential central bank moves to the centre of attention across global markets this evening, when the US Federal Reserve makes a hotly anticipated decision on interest rates.

Jerome Powell, the Fed’s chairman, has spoken of the importance of fighting inflation with rate hikes, but the fast pace of increases has been firmly linked with the outbreak of chaos in the banking sector.

The latest poll undertaken by financial data provider Refinitiv shows that 15% of economists expect no change, with 85% predicting a 0.25% rise, the same action taken in February.

Wednesday’s announcement on US interest rates marks the anniversary of the first hike of the current cycle. It has lifted its Fed Funds target rates eight times since to its current range of 4.5% and 4.75%. It was at 0.25% to 0.50% a year ago.

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The collapse of Silicon Valley Bank -- the biggest bank failure since the 2008 financial crisis -- and the rescue of a series of regional US lenders, stemmed in part from the sharp drop in the value of their government bond holdings due to rising base rates.  So did the $3.3 billion (£2.7 billion) fire sale of fallen finance giant Credit Suisse to UBS.

Neil Wilson, chief market analyst at Finalto, said the Fed “faces a dilemma today” between keeping “the hammer down on inflation or bowing to financial stability concerns,” adding:

“It will have reservations about hiking for sure in the wake of the SVB-Credit Suisse debacles, but it’s got the inflation dragon to slay and should continue on the path.”

The speed at which the hikes have rippled through the financial system has picked up, reducing the number of buyers for the government bonds which banks hold because they can be readily sold. That has made it more difficult to turn bonds into ready cash to meet financial commitments, knocking faith in the system.

And the fall in demand for bonds as base rates have galloped higher punched a hole on balance sheets from New York to Geneva and London in unrealised losses as their value has dropped, adding to a sense of crisis at times.

In turn, that looks to have left the Fed with less room to act on its instincts that the fight against US inflation is some way from being won.

So much so, there was even talk on Wall Street and in the City earlier in the week that tonight’s vote on rates on the Federal Open Market Committee (FOMC) might even produce a cut.

Michael Hewson, chief market analyst at CMC Markets, called that speculation “a ridiculous notion,” and said it would “send the completely the wrong message at a time when optics are everything.”

He added: If the Fed does have concerns about some parts of the US banking sector, why weren’t they apparent 3 weeks ago when they were pushing the case for keeping a 0.50% rate hike on the table? Ultimately a rate cut could prompt further volatility, prompting a market freak out in that the situation could be far worse than realised.”

At the last rate call in February, investors were looking out for signals from the Fed about the potential end of its run of hikes. The lack of them hit stocks around the world, even as the Fed approved a 0.25% rise, in line with expectations.

This time around, there will also be fresh projections on the economy and the outlook on rates from members of the FOMC this time around, which will be scrutinised by investors after two weeks of drama centred on the banks.