Uncertainty reigns as U.S. mulls whether to raise interest rates

Traders and economists remain split on whether the Federal Reserve will raise its benchmark policy rate on Wednesday, as more actions by the world’s major central banks to stem banking strains and the fallout from the takeover of Credit Suisse kept markets on edge.

Prices of Fed funds futures reflected a roughly 65 per cent probability of a quarterpercentage point rate hike versus about a 35 per cent chance of no change as U.S. markets opened on Monday, in line with similar expectations at the end of last week

The U.S. central bank will begin its two-day policy meeting today as policymakers consider whether still too-hot inflation merits an interest rate hike or whether turmoil in financial markets outstrips those concerns.

The Fed’s current target range is 4.5 to 4.75 per cent.

“I don’t think the Fed has any good options here,” said Tim Duy, chief U.S. economist at SGH Macro Advisors. “The risk is allowing inflation to become even more embedded versus the risk of aggravating a broader banking crisis.”

The Fed usually likes to telegraph the expected outcome of its policy meetings in order not to unsettle financial markets but the fast pace of events in the past week, in which two U.S. regional banks collapsed and

Credit Suisse was rescued by larger rival UBS at the weekend, has upended those norms.

On Sunday, the Fed, as part of a co-ordinated action, offered daily currency swaps to banks in Canada, Britain, Japan, Switzerland and the euro zone in order to ease funding stress in global markets, though banks borrowed only token amounts on Monday.

The tumult has also occurred during the central bank’s pre-meeting blackout period that prevents officials from offering public clarity on their assessment of the situation.

“Barring a catastrophic collapse of the banking sector between today and Wednesday — one that reverberates globally — they will be focused on developments in the economy, which currently supports more policy tightening,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, who forecasts a quarter percentage point rate increase.