The Federal Open Market Committee ( FOMC ) is set to meet this week to decide whether to raise interest rates, with Goldman Sachs analysts predicting that Fed officials will pause rate hikes due to recent banking crises in the US and Europe. CME's FedWatch algorithm puts the odds of the Fed not hiking rates at 31,4%.
Left-leaning economists and analysts have been speaking out against rate hikes, concerned about the potential impact on the labor market. Paul Krugman suggested that the banking mess is cause for the Fed to pause until further information is available.
The Fed has been shrinking its balance sheet, selling off bonds bought during the pandemic to stimulate the economy. However, last week, banks borrowed a total of $300 billion from the Fed to shore up liquidity.
The European Central Bank (ECB) increased interest rates by 0.5 percentage points last week despite the collapse of Credit Suisse as the fight against inflation is taking precedence in Europe.
Common themes among banks that have failed include fraud and ponzi-like behavior. Republican lawmakers are pushing legislation that would have repercussions on municipal finances and services, with retiree healthcare liabilities for New York public employers over a third of a trillion dollars.
The Federal Reserve is losing billions of dollars a week due to its large investment portfolio, and the administration of Biden has not shown urgency in nominating a replacement for the top oversight job. In 2021, 149,000 federal civilian workers owed back taxes, with the IRS taking action against these workers in just 7% of the cases.
The next steps of FOMC meeting and the consequences of their decisions remain unclear. With the banking sector in turmoil and inflation a priority, the Fed will have to weigh their options carefully and consider the far-reaching effects of their actions.