Something broke, but the Fed is still expected to go through with rate hikes


Federal Reserve Chairman Jerome Powell testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing titled The Semiannual Monetary Policy Report to the Congress, in Hart Building on Tuesday, March 7, 2023.

Tom Williams | Cq-roll Call, Inc. | Getty Images

When the Federal Reserve starts to raise interest rates, it generally keeps doing so until something breaks, or so goes the collective Wall Street wisdom.

So with the second- and third-largest bank failures ever in the books just over the past few days and worries of more to come, that would seem to qualify as significant breakage and reason for the central bank to back off.

Not so fast.

Even with the failure over the past several days of Silicon Valley Bank and Signature Bank that forced regulators to spring into action, markets still expect the Fed to keep up its inflation-fighting efforts.

In fact, the dramatic events may not even technically qualify as something breaking in the collective Wall Street mind.

“No, it doesn’t,” said Quincy Krosby, chief global strategist at LPL Financial. “Is this enough to qualify as the kind of break that would have the Fed pivot? The market overall doesn’t think so.”

While market pricing was volatile Monday, the bias was towards a Fed that would continue tightening monetary policy. Traders assigned an 85% probability of a 0.25 percentage point interest rate increase when the Federal Open Market Committee meets March 21-22 in Washington, according to a CME Group estimate. For a brief period last week, markets were expecting a 0.5-point move, following remarks from Fed Chair Jerome Powell indicating the central bank was concerned over recent hot inflation data.

Pondering a pivot

Managing the message

Citigroup economist Andrew Hollenhorst said pausing — a term Fed officials generally dislike — now would send the wrong message to the market.

The Fed has sought to burnish its credentials as an inflation fighter after it spent months disavowing rising prices as a “transitory” effect from the early days of the Covid pandemic. Powell repeatedly has said the Fed will stay the course until it makes significant progress in getting inflation down to its 2% target.

Citi, in fact, sees the Fed continuing to raise its benchmark funds rate to a target range of 5.5%-5.75%, compared to the current 4.5%-4.75% and well above the market pricing of 4.75%-5%.

“Fed officials are unlikely to pivot at next week’s meeting by pausing rate hikes, in our view,” Hollenhorst said in a client note. “Doing so would invite markets and the public to assume that the Fed’s inflation fighting resolve is only in place up to the point when there is any bumpiness in financial markets or the real economy.”

Bank of America said it remains “watchful” for any signs that the current banking crisis is spreading, a condition that could change the forecast.

“If the Fed is successful at corralling the recent market volatility and ringfencing the traditional banking sector, then it should be able to continue its gradual pace of rate hikes until monetary policy is sufficiently restrictive,” Michael Gapen, BofA’s chief U.S. economist, told clients. “Our outlook for monetary policy is always data dependent; at present it is also dependent on stresses in financial markets.”

Powell also has stressed the importance of data for the direction in which he wants to steer policy.

The Fed will get its final look at inflation metrics this week when the Labor Department releases its February consumer price index on Tuesday and the producer price counterpart on Wednesday. A New York Fed survey released Monday showed that one-year inflation expectations plummeted during the month.



Related articles

ChatGPT app downloads are slowing down, BofA finds

Sam Altman, CEO of OpenAIWin Mcnamee | Getty...

Missing Texas Teen Found Alive!

1A miracle occurred two days ago. A missing...

GM second-quarter sales increase 18.8% as supply chain stabilizes

2024 Chevrolet Silverado HD ZR2GMDETROIT – General Motors'...

How A.I. took center stage in the Hollywood writers’ strike

After failing to reach a contract resolution with...


Please enter your comment!
Please enter your name here