growth / taylanibrahim

Recent turmoil in the U.S. banking sector looks set to weigh on financial conditions and economic growth, further complicating the U.S. Federal Reserve Board’s already complicated task of calibrating monetary policy to curb inflation without killing growth.

In a research note, Goldman Sachs said its economists now expect the Fed to pause rate hiking at its next meeting on March 21–22, given the impact of increased stress among small- and midsized U.S. banks.

That stress is expected to lead to tougher lending standards and reduced economic growth this year.

As a result, Goldman’s economists lowered their forecast for year-over-year GDP growth by 0.3 percentage points to 1.2%, adding that the expected tightening in lending standards equates to between 25 and 50 basis points in rate hikes by the Fed.

While Goldman’s economists still expect the Fed funds rate to peak at the 5.25%–5.5% range, uncertainty about the path of rate moves has “sharply increased,” it said, noting that the full impact of the expected shift in lending conditions won’t be known until the “extent of the stress on the banking system becomes clear.”

Economists with Moody’s Investors Service aren’t convinced that the Fed is prepared to pause just yet.

While tighter lending conditions may well weigh on economic growth, helping the Fed in its fight to tamp down demand, “it is difficult to a priori assess the extent and level of additional tightening that will occur via the banking and financial system,” Moody’s cautioned.

As a result, unless financial stability risks spike in the coming days, it still expects the Fed to hike rates by 25 basis points next week, while signalling that the impact of any tightening in lending conditions will factor into its future rate decisions.

However, “if banking stress intensifies, the Fed may well pause rate hikes to assess the situation, and the Fed and other central banks could convene emergency meetings to provide guidance and stem potential panic,” it said.

Given the increased uncertainty, “financial markets are likely to remain volatile over the coming weeks,” Moody’s said.