All eyes are trained on the Federal Reserve as it prepares to announce another potential interest rate hike Wednesday afternoon – exactly 10 days after the Biden administration stepped in with dramatic emergency actions to contain the fallout from two bank failures.
Biden White House officials will be closely watching the highly anticipated rate decision – and monitoring every word of Fed Chairman Jerome Powell’s public comments – for any telling clues on how the central bank is processing what has emerged one of the most urgent economic crises of Joe Biden’s presidency.
The moment creates a complex, if carefully observed, dynamic for the administration’s top economic officials who have spent much of the last two weeks engaged in regular discussions and consultations with Powell and Fed officials as they’ve navigated rapid and acute risks to the banking system.
The Fed’s central role is not only to supervise US banks and the stability of the financial system. It also can provide backup funds for banks in moments of systemic risk, a responsibility that has once again thrust the central bank back to center stage in the government’s effort to stabilize rattled markets.
But Biden has made the central bank’s independence on monetary policy an unequivocal commitment – and has repeatedly underscored that he has confidence in the Fed’s central role in navigating inflation that has weighed on the US economy for more than a year and remained stubbornly persistent.
Even as some congressional Democrats have directed fire at Powell for the rapid increase in interest rates and the risks the effort poses to a robust post-pandemic economic recovery, White House officials have taken pains not to shed light on their views publicly.
Officials stress nothing in the last week has changed that mandate from Biden – and note that the widespread uncertainty about what action the Fed will take on rates only serves to underscore that reality.
It’s a reality that comes at a uniquely inopportune time for a banking system that has shown clear signs of stabilizing in the last several days, but is still facing a level of anxiety among market participants and depositors about the durability of that shift.
“I do believe we have a very strong and resilient banking system and all of us need to shore up the confidence of depositors that that’s the case,” Treasury Secretary Janet Yellen said during remarks Tuesday in Washington.
Yellen said a new emergency lending facility launched by the Fed, along with its existing discount window, are “working as intended to provide liquidity to the banking system.”
But prior to the closures of Silicon Valley Bank and Signature Bank, analysts had widely predicted that the Fed would unveil a half-point rate hike. But after the sudden collapse of the two banks that sent shockwaves across the global economy, there has been a growing belief among Wall Street analysts that the central bank will pull back, and only raise rates by a quarter-point – in part to try to alleviate concerns that the Fed’s historically aggressive rate hikes over the past year were precisely to blame for this month’s financial turmoil.
But there are also concerns that a dramatic pullback, like choosing to forgo any rate increases altogether until a later meeting, would bring its own risks of signaling to the market that there are deeper systemic problems.
It’s a conundrum top Fed officials started grappling with in the first of their two-day Federal Open Market Committee meeting on Tuesday. How they choose to navigate the path ahead will remain behind closed doors until their policy statement is released Wednesday afternoon.
Powell is scheduled to speak to reporters shortly after.
For officials inside the Biden White House, Wednesday is poised to offer critical insight into how the central bank is grappling with its urgent priority of bringing down inflation, while at the same time, minimizing the risk of additional dominoes falling in the US banking sector.
Those two imperatives – bringing prices down and maintaining stability across the US financial sector – are urgent priorities for the Biden White House, particularly as the president moves closer to a widely expected reelection announcement and the health of the economy remains the top issue for voters.
Yet the Fed’s decision will come at a moment of accelerating political pressure on the Fed itself – and Powell specifically.
Massachusetts Democratic Sen. Elizabeth Warren, a member of the Senate Banking Committee, slammed Powell, saying he has failed at two of his main jobs, citing raising interest rates and his support of bank deregulation.
“I opposed Chair Powell for his initial nomination, but his re-nomination. I opposed him because of his views on regulation and what he was doing to weaken regulation, but I think he’s failing in both jobs, both as oversight manager of these big banks which is his job and also what he’s doing with inflation,” Warren said on NBC’s “Meet the Press.”
White House officials have made clear – with no hesitation – that Biden’s long-stated confidence in Powell is unchanged. Powell, who was confirmed for his second four-year term as Fed chair last year, announced last week that the Fed would launch a review into the failure of Silicon Valley Bank.
Treasury and Fed officials, along with counterparts at other federal regulators and their international counterparts, have continued regular discussions this week as they’ve monitored the system in the wake of the weekend collapse, and eventual sale, of European banking giant Credit Suisse.
US officials viewed the Credit Suisse collapse as unrelated to the crisis that took down the US banks a weekend prior, although they acknowledged it posed broader risks tied to confidence, or the potential lack thereof, in the system.
In recent days, White House officials have begun to cautiously suggest that they see signs of the US banking sector stabilizing, following the turbulent aftermath of the closures of Silicon Valley Bank and Signature Bank. Biden, for his part, has credited the sweeping steps his administration announced – namely, the backstopping of all depositors’ funds held at the two institutions and the creation of an emergency lending program by the Federal Reserve – as having prevented a broader financial meltdown.
He has also called on US regulators and lawmakers to strengthen financial regulations, though it is not yet clear what specific actions the president may ultimately throw his weight behind.
Press secretary Karine Jean-Pierre declined to comment Tuesday afternoon at the White House press briefing on how she and other officials were watching the Fed’s upcoming decision.
“The Fed is indeed independent. We want to give them the space to make those monetary decisions and I don’t want to get ahead of that,” Jean-Pierre said. “I don’t even want to give any thoughts to what Jerome Powell might say tomorrow.”