The Federal Reserve is expected to take the safest path to tackle inflation. And to meet the market expectation, a quarter-point hike this week can happen, especially when considering the risk of a pause causing inflation which will bring the market back into the bearing.

The current turmoil in the banking system sparks uncertainty with the central bank's previous transitory inflation call. Then this also puts concern about its credibility. Meanwhile, the market pricing of a hike might be the safest way for the Fed, although it's not inevitable.

A survey conducted by US media stated that 80% of traders expect the Fed to make a rate hike of 0.25%, probably to be decided on Wednesday. The Fed can still be on a mission to restore credibility, which is the central bank's most important asset.

Many are worried about the Fed's decision that it is unwilling to dits its transitory inflation call. All the activities carried out cause a reacceleration in inflation. Especially when you see the sticky price pressure, the market may lose its bear zone too.

Pause or Hike Interest Rates by 25 Basis Points, This Is the Fed's Main Consideration of Each Approach

"If there is a pause or even a cut in the rate that the Fed has set, then the economy would accelerate. Meanwhile, for the CPI (Consumer Price Index), it will go up, maybe around six or seven percent again, and the Fed will receive backlash from politicians," said Zhiwei Ren.

The Managing Director and Portfolio Manager at Penn Mutual Asset Management also told Investing.com that the Fed could lose credibility again if the economy goes down. So the decision that the Fed will take on Wednesday will be decisive.

"They made the mistake of calling transitory inflation, so they wasted some political capital. So I don't know if they still have more political capital to spend now," continued Ren.

Meanwhile, other experts said that there is a possibility that at its March meeting, the Fed will pause due to stress in the banking system. Bringing inflation back to 2% is the medium-term goal, so this can get back on track quickly if it is appropriate and has a good effect.

"The latest economic data have come in stronger than expected, thus suggesting that the ultimate level of interest rate is likely to be higher than previously anticipated," said Powell earlier this month. But until now, the Fed will meet on Wednesday, and the outcome is unclear.

The market probabilities are 73% for a quarter percentage point move and 27% for no move. The market is also growing in confidence of a hike. But related to the banking system, which is under stress, the recommendation is to pause the hike.

US economist at Oxford Economics also said that inflation is still hot, so the Fed has better ways to alleviate banking sector stress than interest rates. But there is no rush to hike for now because the threat is not hyperinflation either.

Banking Crisis Adds Concern to the Fed, Especially Because It's In an Inflation Fight

The stressed financial system is now adding to the dilemma for the Federal Reserve. The strongest tool and benchmark interest rate are in an unclear state. And the central bank will aggressively raise interest rates, perhaps most significantly targeting the Fed's target of 2%.

The continuation of the rate hike will create a banking crisis, so the pause on the rate increase can be an excellent solution to fight inflation. This makes high prices persist and eat away, creating a delicate balance and ensuring prices are stable there.

The US economy is receiving attack after attack, and most recently, from the banking system. The main concern here remains the inflation target. The US Central Bank is also highly scrutinized regarding its decision, and it is hoped that the Fed can stabilize prices.