If it’s not broken, don’t fix it. It’s a motto that should appeal to everyone — even the world’s most powerful central bankers.

Up until the weekend, the Federal Reserve was all but certainly going to keep charging forward with its fastest rate-hiking campaign since the 1980s, approving the ninth consecutive rate increase at its March 21-22 Federal Open Market Committee (FOMC) meeting. Fed Chair Jerome Powell was even warning that officials may go with a bolder half-point hike if inflation and the job market stayed hotter than expected.

Then California-based Silicon Valley Bank (SVB) collapsed. New York-based Signature Bank toppled two days later.

Experts say the events that led to both banks’ failures don’t appear to mirror the 2008 financial crisis. Yet, the concern is whether any contagion could spread to banks beyond the ones that failed — and if continuing to raise interest rates could cause more damage.

In the days since the two bank failures, credit agencies Fitch Ratings and S&P Global substantially downgraded another regional bank’s rating over concerns depositors may still decide to pull their cash. Switzerland-based Credit Suisse, meanwhile, has been facing financial troubles of its own, with the U.S. banking turbulence exacerbating its struggles to raise cash.

The Fed’s Sunday announcement that it would loan cash to banks coupled with the FDIC’s decision to make all depositors whole “was the right move to avert a broader contagion,” says Greg McBride, CFA, Bankrate chief financial analyst. “That in and of itself should be enough to stabilize the system, as long as there aren’t any more monsters lurking around the corner.”

Here’s what to expect from the Fed’s March meeting, including whether officials will stick with combating inflation — or sideline hiking rates to avoid adding more fuel to the fire.

1. How much will the Fed raise rates in March — if at all?

Fed officials have two main choices when deciding how to fight inflation while also dealing with the U.S. bank blowups. They can either turn a blind eye to it and stay focused on price stability, continuing to fire away rate hikes despite the risk that it could add more tension to the banking sector. Or they can hold for now to give the financial system time to stabilize, even if it comes at the risk of keeping price pressures hot.

Financial stability is often considered the Fed’s third mandate, and waging a war against inflation can’t happen without it.

“This is day-to-day depending on the health and stability of the financial system,” McBride says, referring to the Fed’s rate decision. “All else equal, they’re going to continue to fight inflation. That assumes there’s financial stability, and if there’s not, then the rate hikes could go on pause. Financial stability is number one.”

Complicating the Fed’s dilemma even more, prices in February rose 6 percent from a year ago, a slightly slower pace from January’s 6.4 percent pace, according to the Department of Labor. But prices actually heated up when you squeeze out food and energy costs. So-called core inflation in February climbed from the previous month at the fastest pace since September.

Services rose 7.6 percent, while a more specific measure of services inflation excluding energy, food and housing has climbed 3 percent on a three-month average annualized pace, according to calculations from Joe Brusuelas, chief economist at RSM. Rising shelter costs contributed more than 70 percent of the annual inflation increase, with rent prices climbing 8.8 percent, the Department of Labor release also showed.

Also in the mix, separate data from the Department of Labor showed job growth boomed faster than expected in February.

Had SVB and Signature not failed, economists said both reports would be enough to prompt a faster half-point move from the Fed.

“Watching inflation as well as other recent developments, the Federal Reserve has a needle to thread,” says Mark Hamrick, Bankrate senior economic analyst. “The bank failures of the past week have pushed financial stability issues to center stage, but inflation remains in the spotlight and is part of its dual mandate along with maximum employment.”

Federal Reserve
If the Fed still raises rates, experts say it’ll likely be by a quarter of a percentage point. If it holds this month, it could prove to be short-lived, with the Fed picking back up on rate hikes at its next meeting in May — so long as the banking meltdown doesn’t evolve into a full-fledged crisis.

The two bank failures seismically altered expectations around how much the Fed could hike rates in March. Investors on March 7 saw a 69.8 percent chance of a half-point hike, the same day Powell opened the door to the faster move in his testimony to lawmakers on the Senate Banking Committee, CME Group’s FedWatch showed.

By March 13, however, no investor saw that as a likely outcome. Instead, the Fed was mostly seen as raising rates by a quarter point. Market participants also said the chances of no rate hike were close to 1-in-3 (or 35 percent).

Investors are still unclear on what to expect. Market participants on Tuesday saw a near 80 percent probability of a quarter-point hike in March, according to CME Group. By Wednesday, however, those odds had fallen to nearly 48 percent, with the chances of no move seen at nearly 52 percent.

Economists aren’t even yet sure what the Fed will do. Goldman Sachs said in a note to clients late Sunday it no longer expects the Fed to raise interest rates at its March meeting. Moody’s Analytics, meanwhile, said Tuesday it expects the Fed to pause in March before raising interest rates by a quarter of a point in May and June. Bank of America and Citigroup, however, both see the Fed following through with a rate hike — granted at the smaller quarter-point pace.

“The Fed is certainly going to be more thoughtful and measured because of the risks that are created when tightening comes fast and furious,” says Kristina Hooper, chief global market strategist at Invesco. “This could be a fairly ideal outcome if it dissuades the Fed from hiking rates 50 basis points, which increases risk, but avoids no rate hike at all, which might be problematic in terms of letting inflation fester and perhaps become more entrenched.”

2. How did the two bank failures alter the Fed’s plans?

The Fed on Sunday created its first emergency lending facility since the coronavirus pandemic. Banks hoping to boost their capital to meet their depositors’ demands can now tap the Fed for extra liquidity by exchanging assets like mortgage-backed securities or Treasurys as collateral.

There’s just one major catch: The Fed will value those assets at their original value. It means banks don’t have to take the kind of losses SVB did when they sell those assets — a factor that contributed to the bank’s collapse.

The facility is large enough to backstop all U.S. deposits, according to the Fed.

Experts say the facility should prove effective at its primary job: preventing more bank runs. It might also provide the Fed cover to keep focused on its original objective of combating inflation.

“The Fed rummaged around in its toolbox and pulled out a more appropriate tool that did not stop it from focusing on its other mandate of price stability,” Hooper says. “Just like in a basketball game, if a player falls down, maybe gets a little spit and blood on the floor, you can clean up after what happened, and then you keep moving on. The Fed may very well view the creation of this facility as enabling it to continue to tighten.”

Yet, financial markets on Wednesday remained jittery about a potential banking crisis. Highlighting fears that more pain could be ahead, a key index tracking regional bank stock performance has plunged 15 percent since March 9.

Even the nation’s largest banks are taking a beating, with J&P Morgan Chase’s stock sliding nearly 5 percent Wednesday. The broader S&P 500 index is down 1.7 percent.

With turmoil still lingering in financial markets, the Fed may not want to deliver a rate hike and add to further volatility.

“The Fed has a great interest in financial stability,” says Curt Long, chief economist and vice president of the National Association of Federally Insured Credit Unions. “Once it’s further in the rearview mirror, if we get another period of no more banks failing, maybe it will be easier to resume rate hikes further down the road.”

3. What will the Fed signal about the future in its rate and economic projections?

A March pause doesn’t necessarily indicate the Fed is done. Experts say it might just be meant to give markets and the banking sector time to catch their breath before picking back up again in May.

Along with its rate decision, Fed officials will also update their projections for the U.S. economy and interest rates through 2025, including where they see the federal funds rate, unemployment and inflation heading.

Powell just on March 7 said it is “very likely” that rates will have to rise even higher than the Fed last predicted in December. At the time, those forecasts penciled in a terminal rate of 5-5.25 percent, though seven officials saw rates rising even higher than that.

A major point Powell will have to address is whether that judgment still stands — or whether the two bank failures now show the financial system might not be able to handle many more rate hikes from here. The Fed’s fresh projections could give policymakers the opportunity to communicate that.

Market participants don’t see the Fed lifting rates much further from here. Investors now see borrowing costs peaking at 4.75-5 percent by May, just 25 basis points from its current level, before cutting them 100 basis points by the end of the year, CME Group data shows. Even if Powell and Co. look slightly more hawkish, the divergence could move markets.

A tightening in financial conditions could be disinflationary, and price increases were already expected to slow this year as wage growth and housing costs cool.

But the inflation fight isn’t over. Core prices are expected to rise 5.04 percent in the first three months of 2023, according to the Cleveland Fed’s “nowcast,” which is updated daily based on current economic indicators. A Survey of Professional Forecasters poll from February predicted those prices would rise 3.8 percent over the period.

Abandoning the inflation fight too soon could make prices stickier and even lead to more financial stability risks down the road — especially if the Fed has to end up playing catch up.

“The March FOMC meeting brings tough choices for U.S. central bankers,” says Christian Scherrmann, U.S. economist at DWS Group. “Right now, it seems like households, for the most part, still experience more pain from higher prices than from higher rates.”

Bottom line

For consumers, the playbook doesn’t change. Variable-rate debt is much more expensive than it was at this time last year. That’s especially so for high-cost credit card debt, with rates soaring to a new high of 20.04 percent APR on March 15, according to Bankrate data.

Volatility could continue, and major financial shocks make it harder for the U.S. economy to avoid a recession. Maintain a diversified portfolio, but don’t make any knee-jerk reactions based on day-to-day volatility. Concentrate on building up an emergency cushion of cash that you can also use if any unplanned, emergency expenses arise.

The failures of SVB and Signature underscore just how important it is to make sure your cash falls within the standard $250,000 FDIC insurance guideline, though experts say the accounts that breach those limits are often commercial.

SVB and Signature’s failures raised a valid concern for consumers: What do you do if you work for a company that has a large majority of uninsured deposits in a bank that fails? The Fed’s facility was designed to help prevent more banks from failing.

To experts, the central bank’s speedy intervention to backstop deposits showed just how important officials thought it would be to restore confidence — and also just how much the Fed’s scope, power and mandate have changed since the last time it raised rates this much.

“The Fed has become a more activist central bank in the last 15 to 20 years,” Hooper says. “It’s just a different central banker mentality than what we saw in the 1980s, when [former Fed chair] Paul Volcker gave a lot of tough love — maybe not even any love, just tough.”