On Wednesday, the Federal Reserve will announce its decision on monetary policy. Analysts at Danske Bank see the Fed raising rates by 25 basis points despite recent turmoil amid banking sector jitters.
Fed cannot afford to stop tightening monetary policy
“This week, the ECB emphasized that there is no trade-off between inflation and financial stability risks, and we expect Fed to deliver a similar message next week. The new Bank Term Funding Program, allowing banks to tap liquidity from the Fed against collateral valued at par, provided banks with USD11.9 billion during its first three days of use.”
“So far, short-term real rates and broader financial conditions have remained relatively stable. Our in-house ‘growth tax’ measure is at modestly restrictive territory, as the tightening in credit and equity components has compensated for the lower yields and mortgage rates. This suits Fed well as long as macro data remains strong, and for the time being, we like our call of a 25bp rate hike next week and a terminal rate at 5.00-5.25% in May. Hence, we see modest upside risks to short-term rates from current levels.”
