The Federal Reserve’s monetary policy meetings have been dominated by discussions of inflation for the past two years. However, recent events have brought financial instability to the forefront of conversations. Following the collapses of Silicon Valley Bank and Signature Bank, the Fed is left with the decision to continue raising interest rates or pause until the storm passes. Experts predict that the Fed will raise interest rates by a quarter percentage point for the ninth time to the 4.75%-5% range.

Fed Chairman Jerome Powell is the first to provide answers during a press conference following each monetary policy meeting, allowing him to deliver his ideas with exceptional clarity. The market will closely monitor any references to the banking failures in the Fed’s statement and Powell’s remarks to reporters.

Before Silicon Valley Bank’s sudden death due to a run on deposits, Powell was debating whether to increase interest rates by a quarter or half a percentage point. Inflation, which remains well above the 2% target, seems entrenched, having given up some ground in the last seven months. Moreover, core inflation is still relatively high.

During its most recent meeting in February, the Fed already slowed the rate hike pace, approving a 0.25% increase after four straight increases of 0.75% and a subsequent increase of 0.50. Investors anticipated a similar rise in March since the central bank has already indicated that more increases would be necessary. But, Powell spoke before Congress and cautioned that rate rises might speed up again in the wake of January’s outstanding employment data and indications that demand was not slowing down.

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Official interest rates have increased from close to 0% to the 4.5-4.75% range in less than a year, the sharpest increase in the price of money since the early 1980s. The value of the long-term Treasury bonds that financial institutions hold has decreased due to the rate increase, which in turn contributed to Silicon Valley Bank’s crisis along with other mistakes and faults made by the bank. Unrealized losses held by other institutions are hundreds of billions of dollars.

Several experts have made predictions concerning the probability of a slowdown in rate rises in response to Silicon Valley Bank’s collapse and the ensuing financial storm. Goldman Sachs considered a delay “in light of the recent tensions in the banking system.” However, most analysts anticipate a hike of 0.25%, following the same script as the European Central Bank and the Bank of England: rate hikes to combat inflation and liquidity measures to relieve financial stresses.

While the decision of the Federal Reserve to raise rates amidst the current financial storm may seem risky, it is essential to note that it is not the only approach available to them. The Fed could pause rate hikes until the financial situation stabilizes or implement alternative monetary policy tools, such as quantitative easing, to address the current economic challenges.

In conclusion, the Federal Reserve’s decision to raise interest rates amidst the current financial storm is a delicate balancing act that demands careful consideration of the potential risks and benefits. While rate hikes may be necessary to combat inflation, they can also exacerbate financial instability, particularly in the current economic climate. As such, it is important for the Fed to carefully consider alternative approaches, such as pausing rate hikes or implementing quantitative easing to address the current economic challenges.