All Eyes on the Fed as it aims to Balance Banking Crisis and Inflation

Today all eyes will be on the Federal Reserve, as it holds one of the most uncertain policy meetings in years. The Fed will be forced to balance the consequences of a banking crisis and inflation that remains above target.

The expectation is that the Fed will raise interest rates by 0.25% bringing the benchmark interest rate range to 4.75%-5%. This would be the highest benchmark interest rate since 2006.

The decision will be released at 2 pm ET this afternoon, followed by a press conference at 2:30 pm ET where Fed Chair Jerome Powell will explain the decision.

At the beginning of March Fed Chair Jerome Powell stated that strong economic data would likely push interest “higher than previously anticipated.”

However, shortly after this announcement Silicon Valley Bank, was taken into receivership by the FDIC, marking the second-largest bank failure in U.S. history. This led the Fed, Treasury, and FDIC to backstop deposits at the bank. Regulators also seized Signature Bank, and the banking industry organized a de facto bailout of troubled lender First Republic. Investors fear that First Republic will be the fourth U.S. bank to fail this month as shares reached a record low on Monday.

Despite the turmoil in the banking system, Bitcoin has performed very well over the past week and a half. At the time of writing Bitcoin is just over 28,000 USD. Earlier in the week it reached 9-month highs.

This was in large part due to the Fed’s response to the failure of SVB and Signature, known as the “Bank Term Funding Program (BTFP)“, which aims to provide emergency liquidity to US deposit institutions, including banks, credit unions, and savings associations. Certain investors and traders see this injection of liquidity as something that will set up a situation similar to the asset inflation that occurred following the government’s response to COVID.

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While most traders appear to believe that the Fed will raise rates by 0.25%, a rate pause will likely send markets soaring higher, while a 0.5% hike will cause a crash.