Will financial stability needs supplant inflation goal?

The Fed has a very difficult policy decision to make at next week’s FOMC meeting – should it hold interest rates unchanged in the wake of the SVB collapse to shore up market confidence or, with core inflation proving sticky, should it keep on hiking interest rates? Does it prioritise financial stability or monetary policy? We suspect that, with regional bank stocks rebounding, the Fed will probably continue with a 25bp rate hike, but it is a very close call. As the emerging problems at Credit Suisse – one of the Fed’s primary dealers – illustrate, however, the risk of a full-blown contagion remains, and a lot can happen in the week until the announcement.