The Fed is meeting this week against an increasingly cloudy economic backdrop. Turmoil has re-erupted in the nation's banking sector afterover the weekend. It was the second-largest U.S. bank failure ever and the third major banking collapse in the past six weeks. Investor anxieties about whether other regional banks may suffer from problems similar to First Republic's sent stocks sharply lower Tuesday.
Both developments could weigh on an already slowing economy. The Fed wants the economy to cool somewhat, because less borrowing and spending should also help rein in inflation. But particularly if political battles around the debt ceiling worsen, the economy could fall into a deep enough recession that the Fed might be forced to cut interest rates sometime this year — even if inflation isn't fully in check.
The Fed's likely rate hike Wednesday comes as other major central banks are also tightening credit. European Central Bank President Christine Lagarde is expected to announce another interest rate increase Thursday, afterConsumer prices rose 7% in the 20 countries that use the euro currency in April from a year earlier, up from a 6.9% year-over-year increase in March.
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