I don’t think there’s a significant chance that the Federal Reserve won’t raise interest rates at its March 16 meeting. Inflation is just too potent and the risk to the U.S. central bank (and economy) just too great of encouraging a perception that the Fed has fallen behind inflation and has indeed has lost control of price increases.
So, yes, as everyone expects, the Fed will raise interest rates. And signal that more increases are to come.
But the case is very different for the Fed’s announced plans to end in March its purchases of Treasuries and mortgage-backed assets (the program call Quantitive easing that was designed to stimulate the economy) and plans to start shrinking its balance sheet by not buying new bonds as holdings in its portfolio mature.
Now, I think, the war of financial sanctions that has become a crucial battlefield after Russia’s invasion of Ukraine says that maybe this is exactly the wrong time to take liquidity out of global financial markets.
Banning most Russian financial institutions from the SWIFT system of international payments threatens to leave a lot of stranded assets scattered across the financial markets. And every stranded asset means that someone, somewhere isn’t getting paid the dollars or euros or (shudder) roubles that he or she was expecting. And that results in a liquidity crunch of unknown dimensions and who knows which bank in danger.
In this situation central banks, like the Fed are supposed to provide liquidity–they are the lenders of last resort. Which means that the Fed and other central banks should be out adding to the size of their balance sheets as they provide liquidity to the financial markets.
This kind emergency, fortunately, gives the Fed a perfect reason to delay any balance sheet tightening. If the Fed does announce that kind of surprise on March 16,the effect would be a rally in Treasuries (since the Fed would be going into the market to buy more n oder to provide liquidity to the system.)
Today, February 28, at the close in New York, the yield on the 10-year Treasury was down 12 basis points to 1.84%. The yield on the 2-year Treasury was down to 1.45% from 1.57% on Friday.
