The Federal Reserve has a lot of balls in the air: Central bank officials are attempting to juggle their economic goals of maximum employment and price stability while maintaining financial safety and security in the midst of a banking meltdown.
This week, we'll hear from Fed officials for the first time since the collapse of Silicon Valley Bank and Signature Bank, the sale of Credit Suisse and the lifeline extended to First Republic. The big question is what they'll do next. A policy rate announcement is expected on Wednesday along with new economic projections, and Federal Reserve Chair Jerome Powell will face the press to answer questions.
Powell, the face of the mission, has no easy task ahead of him as he attempts to balance those three mandates while keeping a cool and reassuring facade.
Here are five big questions that he'll likely face.
Is the Fed's fight against inflation destabilizing the banking system?
The US banking system is under a lot of pressure right now. That's partially because the Federal Reserve's rate hikes have undermined the value of Treasuries and other securities, a critical source of capital for most US banks.
When Silicon Valley Bank was forced to sell those bonds quickly at a substantial loss, the bank ran into a liquidity crisis and collapsed.
The question is whether the Fed's fight against still-sticky inflation will further destabilize banks and how the central bank is analyzing that possible trade-off.
Is the economy beginning to crack?
The good news in all of this, wrote JPMorgan chief global strategist David Kelly in a note on Monday, is that inflation appears to be on a well-established downward track. But the bad news, he wrote, "is that further Fed tightening has the potential to worsen financial instability, threatening the economy with recession."
Lowering inflation is costly and has created economic damage and "cracks in the financial system," wrote BlackRock analysts in a note on Monday. "This week's events will crimp bank lending, reinforcing our recession view," they added.
The banking sector meltdown certainly exposed a crack in the financial industry — investors will be wondering exactly how deep that crack goes and if it could spread into other parts of the economy.
The Federal Reserve's economic projections will include unemployment and economic growth forecasts — showing whether policymakers are also seeing those cracks.
Did the European Central Bank make the right decision?
European Central Bank President Christine Lagarde announced an aggressive half-point interest rate hike last Thursday, just hours after Credit Suisse accepted a $53.7 billion loan to help stay afloat.
Lagarde opted to portray that rate increase as a signal that the financial system remains strong. The central bank has the tools if needed to respond to a liquidity crisis "but this is not what we are seeing," she told reporters.
In a speech on Monday, Lagarde doubled down and said that banks in the euro area had "very limited exposure" to Credit Suisse. "We're not talking billions, we're talking millions," she said.
The ECB's stance could open the door to an aggressive hike from the Fed on Wednesday.
Investors will be closely watching to see if Powell borrows that messaging tactic from the ECB: To carefully distinguish its inflation-fighting campaign from its work to contain financial system woes.
Does the data justify a pause in rate hikes?
The ongoing banking sector chaos has led some economists and analysts to call for a moratorium on rate hikes until the industry sorts itself out.
Goldman Sachs analysts wrote in a note on Monday that "while policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient."
Goldman predicts that the Fed will pause its rate hikes at least for the time being. "It does not make sense to tighten monetary policy amidst ongoing stress in the banking system that could present substantial downside risk to the economy," wrote the team, led by chief economist Jan Hatzius.
"Addressing stress in the banking system is the most immediate concern and must take priority over other less urgent goals for the moment."
At the same time, inflation remains well above the central bank's goal of 2%, economic data continues to show labor market strength and consumer spending resilience, and Fed officials have signaled their intent to tighten monetary policy aggressively until price hikes ease.
Wall Street is currently pricing in a nearly 75% chance of a quarter percentage point rate hike on Wednesday, according to the CME FedWatch tool.
Will the money run out?
The Federal Reserve launched the emergency Bank Term Funding Program, backed by $25 billion from the US Treasury in response to the collapse of SVB and Signature Bank. So far, banks are making good use of it. The latest data, from last Thursday, shows that banks have already borrowed nearly half of that guaranteed backing, or $11.9 billion.
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