Just days ago, debate was raging over how big the US Federal Reserve’s rate hike would be at its March meeting given hotter-than-expected economic data.
Chairman Jerome Powell surprised markets last week by suggesting that the Fed may hike rates higher than previously expected and need to step up the pace of rate hikes amid signs of broad inflationary pressures in the economy. The hawkish commentary prompted investors to reevaluate their expectations for the meeting, with many increasing the likelihood of the Fed approving a half-percentage-point hike during its March 21-22 meeting.
But Wall Street no longer sees that as a possibility after Friday’s stunning Silicon Valley bank implosion rattled global markets and sparked fears of a broader financial crisis.
SHUTDOWN OF SIGNATURE BANK IN CONNECTION WITH THE COLLAPSE OF SILICON VALLEY BANK
The likelihood of the Fed pausing its rate hike campaign next week rose to 28% Monday, up from 0% a day ago, according to data from CME Group’s FedWatch tool. Meanwhile, around 71% of traders expect a typical quarter-point hike.
Goldman Sachs is among notable Wall Street firms to predict the Fed will not hike rates at its meeting, citing “recent tensions” in the financial sector. The company had previously expected a 25 basis point rise.
“Given the stress in the banking system, we no longer expect the FOMC to come up with a rate hike at its next meeting on March 22,” Goldman economist Jan Hatzius said in a Sunday note.
FIRST REPUBLIC SHARES decline on SVB CONTAGION FEAR
Many economists expect the Fed to hike rates again next week, albeit more slowly and cautiously than without the collapse of SVB — a key lender to tech startups and venture capital firms. That’s partly because federal regulators stepped in on Sunday night to prop up the banking system and protect all deposits with the SVB.
“While the Fed has a history of lowering interest rates following major negative financial events such as a bank failure, regulators’ efforts to bail out SVB depositors and provide credit to struggling banks will reduce systemic risk and allow the Fed to raise interest rates.” continue to ramp up efforts to further fight inflation,” said Richard Saperstein, chief investment officer at Treasury Partners.
Central bankers are in the midst of the most aggressive campaign since the 1980s to quell persistently high inflation. Though the consumer price index has slowly fallen from a peak of 9.1% in June, it has stays about three times higher than the pre-pandemic average. New inflation data to be released Tuesday morning is expected to show that the CPI rose 0.5% through February and 6.1% yoy, underscoring the spread of high consumer prices.
Officials slowed the pace of rate hikes by a quarter of a point during its meeting last month, raising the benchmark overnight interest rate to a range of 4.5% to 4.75%. This was followed by a half-point rise at their December meeting and four consecutive moves of 75 basis points before that. The central bank usually moves rates in quarter-point increments.
At the time, policymakers suggested that slower interest rate movements might allow them to better gauge the impact of tighter monetary policy on the economy.
CLICK HERE TO READ MORE ABOUT FOX BUSINESS
Powell stressed last week that incoming data — including February’s jobs report and fresh inflation data on Tuesday — will play a big role in the Fed’s decision at its upcoming meeting.
“We have some potentially important dates coming up,” Powell said. “These will be important and we will look at them… We haven’t made a decision on the March meeting yet.”