Uddrag fra Seelingalpha:
This week, the Federal Reserve meeting places the Fed in what some call a difficult situation. They can either stick to their initial plan of raising rates by another 25 basis points and signaling more hikes in the future, or they can capitulate, do nothing, and maintain the December dot plot.
Before the Silicon Valley Bank incident, it was a straightforward decision for the Fed to raise rates by 25 basis points and signal a peak terminal rate of approximately 5.50%. However, following the news of Silicon Valley Bank’s failure, investors seem perplexed.
Two Different Directions
Two distinct forces are at play here, complicating matters. However, if the Fed follows the European Central Bank’s example, the Fed is likely to raise rates by 25 basis points and signal that more hikes are on the horizon. After all, the President of the New York Fed stated in November that “using monetary policy to mitigate financial stability vulnerabilities can lead to unfavorable outcomes for the economy.”
There are two aspects to consider: price stability and financial stability. It appears that the Fed has been attempting to control the pace of the economy and the demand side of the equation through interest rates while using its balance sheet and lending facility to manage the liquidity side of the equation.
One could argue that there is still too much liquidity in the system, particularly with nearly $2 trillion per day directed to the Fed through the Reverse Repo facility. Fed board member Chris Waller noted on January 20, “Every day firms are handing us over $2 trillion in liquidity they don’t need. They give us reserves. We give them securities. They don’t need the cash.” The reverse repo facility at the New York Fed has maintained a level above $2 trillion throughout the entire Silicon Valley Bank events.
If we are to believe that monetary policy should not be used to address financial stability issues and there is ample liquidity in the system. Then it becomes difficult for the Fed not to raise rates by 25 basis points this week and signal more rate hikes.
Using Its Tools
The Fed also has various tools to ensure banks have the necessary liquidity, including using the discount window and its new Bank Term Funding Program. Additionally, some banks could merely opt to reallocate the tremendous amounts of cash being placed into the reverse repo facility every day.
If it is true that the Fed firmly believes that without price stability, the economy does not work for anyone and that price stability is the foundation for sustained economic and financial stability, then the Fed could and probably should continue to raise rates. At the same time, they can use other tools along with the excess liquidity in the system to ensure that banks have continued access to their needs.