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U.S. Federal Reserve Chair Jerome Powell addresses reporters after the Fed raised its target interest rate by a quarter of a percentage point, during a news conference at the Federal Reserve Building in Washington, February 1, 2023. Jonathan Ernst | Reuters

"They have to do something, otherwise they lose credibility," said Doug Roberts, founder and chief investment strategist at Channel Capital Research. "They want to do 25, and the 25 sends a message. But it's really going to depend on the comments afterwards, what Powell says in public. … I don't think he's going to do the 180-degree shift everybody's talking about." Markets largely agree that the Fed is going to hike. As of Friday afternoon, there was about a 75% chance of a quarter-point increase, according to CME Group data using Fed funds futures contracts as a guide. The other 25% was in the no-hike camp, anticipating that the policymakers might take a step back from the aggressive tightening campaign that began just over a year ago. Goldman Sachs is one of the most high-profile forecasters seeing no change in rates, as it expects central bankers in general "to adopt a more cautious short-term stance in order to avoid worsening market fears of further banking stress."

A question of stability

Whichever way the Fed goes, it's likely to face criticism. "This might be one of those times where there's a difference between what they should do and what I think they will do. They definitely should not tighten policy," said Mark Zandi, chief economist at Moody's Analytics. "People are really on edge, and any little thing might push them over the edge, so I just don't get it. Why can't you just pivot here a little and focus on financial stability?" A rate increase would come just over a week after other regulators rolled out an emergency lending facility to halt a crisis of confidence in the banking industry. The shuttering of Silicon Valley Bank and Signature Bank, along with news of instability elsewhere, rocked financial markets and set off fears of more to come. Zandi, who has been forecasting no rate hike, said it's highly unusual and dangerous to see monetary policy tightening under these conditions. "You're not going to lose your battle against inflation with a pause here. But you could lose the financial system," he said. "So I just don't get the logic for tightening policy in the current environment." Still, most of Wall Street thinks the Fed will proceed with its policy direction.

Cuts still expected by year's end