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of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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Free AccessMNI INTERVIEW: Fed Pause Would Undermine Credibility - Plosser
The Federal Reserve would risk undermining its inflation-fighting credibility and raising doubts about the effectiveness of its latest banking sector intervention if it paused interest rate hikes this month while inflation is still far too high, former Philadelphia Fed President Charles Plosser told MNI.
The Fed has repeatedly stated it could separate financial stability measures from interest rate policy and a rate pause would suggest the Fed lacks confidence in its own new lending facility aimed at helping alleviate pressures on the banking sector.
“Given the distinction they make between financial stability policy and monetary policy, I think it would be a mistake to send a signal to actually not do anything in March,” Plosser said in an interview. “That would immediately transmit to the markets that the Fed can be swayed from fighting inflation at the drop of a hat and that would be a very dangerous thing to do because it would undermine their own commitment.”
“They may only want to do 25 basis points and not 50 out of an abundance of caution,” he added.
ABOVE-6% RATES
The current fed funds rate target at 4.50%-4.75% are still below the rate of inflation and therefore still not actually restrictive, which means the Fed needs to keep tightening, he said.
“Policy needs to be above 6%, probably closer to 7%,” he said. “There’s no particular reason why this event should materially affect the inflation outlook at least at this point.” (See MNI INTERVIEW- Fed Will Hike Rates To 6% Or More–Gorodnichenko)
Doing nothing at next week’s meeting “would be a major mistake, because it tells them that the Fed is scared.”
Financial markets have been plunged into turmoil in the last week after the rapid failure of two major regional U.S. banks and the resurfacing of troubles at Swiss giant Credit Suisse.
That has led to wild swings in market expectations for the fed funds rate – from a 50 basis point hike with a peak at or above 5.5% as recently as the middle of last week, followed by speculation that the Fed will either hike just 25 basis points or making no move altogether.
SYSTEMIC EXCEPTION
Plosser said the authorities’ decision to grant a “systemic exception” to Silicon Valley Bank in order to allow them to cover the bank’s uninsured deposits was not warranted given SVB’s fairly narrow portfolio and unique business model.
“I don’t think there’s any reason to believe that banks like the big five or even smaller banks like regional banks are susceptible to this kind of risk that SVB was taking. They’ve dealt with interest rate cycles before,” he said. “The danger is that declaring it as systemic puts fear in everybody’s head.”
“It’s going to be hard to tell the next bank no and implicitly means they’re insuring all deposits now. This takes moral hazard and expands it.”
Ex-Richmond Fed President Jeffrey Lacker this week offered a similar perspective, telling MNI that 'systemic' simply means whatever causes central banks to intervene.
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.