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Suspension of Interest Rate Hikes Expected by Goldman Sachs Economists

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According to reports, Goldman Sachs economists wrote in a report on Monday that given the pressure on the banking system, we expect the Federal Open Market Committee to suspend int

Suspension of Interest Rate Hikes Expected by Goldman Sachs Economists

According to reports, Goldman Sachs economists wrote in a report on Monday that given the pressure on the banking system, we expect the Federal Open Market Committee to suspend interest rate hikes at its meeting in March this week. Although policymakers have actively responded to the crisis to support the financial system, the market does not seem to fully believe that measures to support small and medium-sized banks are sufficient to cope with the crisis. Although not raising interest rates temporarily means suspending the fight against inflation, in fact, the issue of inflation now seems less urgent than last summer, as inflation expectations have fallen sharply recently and long-term inflation expectations have remained stable.

Goldman Sachs: Due to pressure from the banking system, the Federal Reserve is not expected to raise interest rates this week

Introduction

Goldman Sachs economists have recently made a prediction that the Federal Open Market Committee (FOMC) would suspend interest rate hikes at its meeting in March due to the pressure on the banking system. Despite the ongoing efforts from policymakers to support the financial system, the measures taken to support small and medium-sized banks are still not considered sufficient to cope with the crisis. This article explores the reasons behind this prediction and its implications on the fight against inflation.

Why Is the Banking System Under Pressure?

The banking system is currently under pressure due to the economic uncertainty caused by the COVID-19 pandemic. Many small and medium-sized businesses have experienced a significant decline in revenue, leading to a rise in delinquencies and defaults in loan payments. This has put a strain on the balance sheets of many banks, particularly those that rely heavily on lending to these types of businesses. As a result, there is a concern that the banking system may suffer a domino effect if too many loans go bad.

Measures Taken to Support the Financial System

Policymakers have taken several measures to support the financial system, such as providing low-interest loans, relaxing lending standards, and purchasing government and corporate bonds. The aim is to ensure that there is sufficient liquidity in the system and that banks can continue to lend to businesses and individuals. However, these measures have been criticized for being too focused on supporting big companies, rather than small and medium-sized businesses that are struggling the most.

Why Is the Market Skeptical About the Measures?

Despite the efforts taken by policymakers, the market is still skeptical about their effectiveness. This is due to concerns that the measures being taken may not be sufficient to cope with the severity of the crisis. There is also a fear that the measures taken may lead to an increase in inflation in the long run, which could be a bigger problem than the current crisis.

The Goldman Sachs Prediction

Goldman Sachs economists expect the FOMC to suspend interest rate hikes at its March meeting due to the pressure on the banking system. This means that the fight against inflation will be temporarily suspended, as raising interest rates would further tighten the already constricted liquidity in the markets. This move is seen as necessary to ensure that banks have sufficient access to liquidity to weather the current crisis. However, it is important to note that this does not mean that the fight against inflation has been abandoned entirely.

Implications on Inflation

The issue of inflation now seems less urgent than last summer, as inflation expectations have fallen sharply recently and long-term inflation expectations have remained stable. This gives policymakers some room to maneuver in suspending interest rate hikes temporarily. However, there is a concern that this could lead to inflation in the long run if the measures taken are not properly calibrated. As such, the FOMC will need to watch the situation closely and adjust the measures taken accordingly.

Conclusion

In conclusion, the current crisis has put a strain on the banking system, leading to a call for more measures to support it. The Goldman Sachs economists have predicted that the FOMC will suspend interest rate hikes at its March meeting to ensure that banks have sufficient liquidity to weather the storm. This move is seen as necessary, given the severity of the crisis. However, it is important to recognize the potential implications on inflation and ensure that measures taken are properly calibrated and monitored.

FAQs

1. What is the FOMC?
The Federal Open Market Committee is responsible for setting monetary policy in the United States.
2. What measures have policymakers taken to support the financial system?
Policymakers have taken measures such as providing low-interest loans, relaxing lending standards, and purchasing government and corporate bonds.
3. What are the implications of suspending interest rate hikes on inflation?
Suspending interest rate hikes could lead to inflation in the long run if the measures taken are not properly calibrated and monitored.

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