The Federal Reserve this week faces one of its toughest calls in years. To hike interest rate again to fight stubbornly high inflation, or to pause amid the most severe banking crisis since 2008. While persistently high inflation suggests that further rate hikes are needed, the recent banking sector stress says a pause is required.

The Federal Reserve’s meeting on Wednesday is the biggest event this week, as the Fed has to decide its next move on interest rates, as the fight against still high inflation is colliding with a stress in the financial sector.

The decision is likely to hinge in part on the forced takeover of Credit Suisse by UBS for a fraction of its market value, and other steps to calm fears of contagion in the financial system. Over the past year the Fed has been pre-announcing its rate moves to avoid surprises and volatility in the market, but until now it has not confronted a crisis just before a policy meeting.

The biggest question investors ask is whether the Fed would hike or pause and at present there is no shortage of views. The only certainty is that the Fed will refrain from a bigger hike that Fed Chair Powell signalled just before the collapse of the three U.S. banks and the arranged marriage between Credit Suisse and UBS. The Fed is very unlikely to challenge markets with a surprise move after bond volatility surged to the highest level since 2008.

The aggressive monetary tightening over the past year underscores the Fed’s commitment to fighting inflation, but it risks exacerbating market upheaval, a recession, and potentially more exhaustive interventions. A quarter point increase now will have a fairly muted effect on inflation, while it could have an amplified effect on financial conditions.

Fears of a broader credit crunch and signs of liquidity strains will also be top concerns for policy makers. In the past week, banks scrambling for cash already drew a record amount of funds from the Fed’s emergency facilities.

An argument for the Fed to pause its rate hikes is that its rapid pace of tightening from near zero in 2022 has now triggered a turmoil in the banking sector and the bond market thinks financial stability become a bigger issue than fighting inflation amid signs that relief packages for U.S. banks and Credit Suisse may not be sufficient to stem wider cracks in the industry.

In the past week alone, banks tapped the Fed for short-term loans of more than $160 billion and major U.S. lenders provided a $30 billion lifeline to First Republic after the collapse of the Silicon Valley Bank and Signature Bank.

The Swiss central bank did the same for Credit Swiss with $54 billion of loans before negotiations began for a sale to UBS for $3.24billion. If the Fed indicates confidence in the banks’ ability to access liquidity and deal with deposit flight, it can keep its focus on inflation.

Nonetheless, according to the CME FedWatch tool, which forecasts the Fed rate hikes based on the bond trading activity, there are 75% probability of a 25-basis point rate increase to the benchmark fed funds rate at the conclusion of the upcoming two-day FOMC meeting and 25% chance for a pause.

Two weeks ago, Fed Chair Jerome Powell signalled that officials are considering whether to raise rates by 25-basis point or a bigger 50-basis point after economic reports revealed the labour market, spending and inflation were stronger than expected this year, reminding us that developments are changing rapidly.

Once the policy statement and forecasts are delivered on Wednesday, investors will focus on just how the Jerome Powell explains its stance without raising further concerns — either for financial stability or inflation.