There is a conundrum for Powell and the Fed: raising interest rates or will not raise interest rates-raising interest rates will accelerate the spread of the banking crisis, but without raising or cutting interest rates, it will allow inflation to remain high.

The Fed will announce its decision to raise interest rates on Wednesday, and under the current circumstances, Fed officials must strike a balance between inflation concerns and new concerns about the spillover effects of banking turmoil, as Nick Timiraos, the new Fed news agency, said.

Fed Chairman Powell and his colleagues this week faced one of their toughest decisions in years: to raise interest rates again to combat stubbornly high inflation or to suspend them during the worst banking crisis since 2008.

Timiraos said Fed officials are likely to be divided at the meeting: Fed officials who believe that loans and other financial conditions face the risk of sudden tightening as a result of the current banking risk shock may be inclined to suspend interest rate increases Officials who believe that the impact of the banking crisis is more likely to be temporary, controlled or moderate may argue for a new rate hike while inflation is still high, aimed at cooling the economy to curb inflation.

Before the Silicon Valley bank thunderstorm, almost all analysts expected the Fed to raise interest rates by at least 25 or 50 basis points, but that view took a U-turn after the crisis.The market now expects the Fed to cut interest rates about three times by January, raising rates by another 25 basis points in March or May at most, before turning downwards.

The current broad consensus is still expected to raise interest rates by 25 basis points in March, with several banks, including Goldman Sachs Group and Barclays, calling for a moratorium, while aggressive Nomura is expected to cut rates, and a few banks are still calling for a 50 basis point increase.

Timiraos thinksThe Fed's decision to continue to raise interest rates by 25 basis points may depend in part on how the market digests the news of UBS's acquisition of Credit Suisse and whether measures taken by the US and other economies to allay market concerns about the banking sector are effective.

Powell's Volcker moment

Steven Blitz, chief US economist at TS Lombard, believes that Powell is ushering in his "Volcker moment"--Either make good on the promise to pull growth below trend and raise unemployment, or back down when the banking sector goes wrong.

He says small banks have always been aggressive lenders and will now change directionBut the broader problem facing the banking system is not mismanagement, but weakness in the technology industryIn this cycle, the technology industry has been distorted by seemingly endless inflows of cheap capital, which are now over:

Today, we cannot know the scale of the problems in the technology industry and how deep its impact will be, because the industry is full of private companies that borrow private money from private intermediaries-there is no scope for data or regulation.

What we can be sure, however, is that many parts of the world have also invested in the US technology industry, making it influential all over the world. The technology industry is not as big as housing, nor is it as leveraged as borrowers or lenders.

But what the technology industry has in common with the housing industry is that it has been distorted by easy money flows in this cycle since the end of the 2008-09 recession.

Each cycle has its own model, the center of the recession.

Blitz thinksThe Fed should raise interest rates by 25 basis points, but given the recent instability of capital flows, they are more likely to back downAnd take the expected tightening of financial conditions as a sufficient reason to keep the interest rate on capital unchanged:

If the market has stabilized by Tuesday, they are likely to raise interest rates to 25%, but weekend events and new pressure on first Republican Bank suggest that is not the case.

There is no free policy lunch-the warning story of stopping and slowing is obvious in 1966, which is the original sin of the era of inflation.

In the article, Blitz also asks a rhetorical question:

As the asset crisis turns into a credit crisis, isn't that what austerity is all about, regardless of whether technology and its financial ecosystem eventually drag the broader economy into recession?

In what other way could the Fed soften the labour market and balance supply and demand, if not by creating a recession?

Edit / phoebe