March 14, 2023 (MLN): Last week's dramatic collapse of Silicon Valley Bank (SVB) and New York-based Signature Bank has sent shockwaves through the financial industry, with traders and analysts now predicting that the Federal Reserve's cycle of interest rate hikes could come to an end sooner than expected.
Many had previously predicted that the Fed would increase the pace of hikes to tackle inflation, but the troubles in the banking sector have led some to dial back their expectations. Analysts at Goldman Sachs and Wells Fargo now predict the Fed will end its hiking cycle on March 22, while economists at JP Morgan and Oxford Economics see the FOMC voting for a smaller quarter-percentage-point hike.
The collapse of SVB, the biggest banking failure since the 2008 global financial crisis, has left the Federal Open Market Committee (FOMC) in an unenviable position. It must tackle above-target inflation and hot economic data without adding to the ongoing rout of some banking stocks.
To reduce contagion, America's top finance officials unveiled a series of measures over the weekend aimed at restoring confidence in the banking sector and settling turbulent markets. The Treasury, Fed, and Federal Deposit Insurance Corporation set out plans to ensure SVB's customers would be able to access all their deposits in the bank. Signature Bank would also be "made whole", they said in a joint statement on Sunday.
However, while the US has moved to protect customers' deposits, it won't be bailing out the bank's investors, President Joe Biden told reporters on Monday. "They knowingly took a risk and when the risks didn't pay off, investors lose their money. That's how capitalism works," he said.
Sunday's announcement was well received by the financial markets, with the Nasdaq closing up 0.45 percent on Monday. But investors continued to shun banking stocks on Monday, and analysts remain concerned about the broader fallout from SVB's collapse.
"The rapid tightening in financial conditions alongside the uncertainty of the situation makes us lean toward the FOMC taking a pause from its hiking campaign at its upcoming meeting on March 22," Wells Fargo economists wrote in a recent note to investors.
As recently as Thursday, futures traders were predicting a return to a 50-basis-point rise, according to CME Group's FedWatch Tool. But SVB's failure in the days that followed changed the calculus among traders.
The probability of a larger hike fell to zero on Monday, with most interest-rate futures traders now predicting a smaller hike, and a minority expecting no hike at all, calculated CME Group. Growing concerns about the stability of the US financial markets means a 25-basis-point hike is now "slightly" more likely next week, Oxford Economics Lead Analyst John Canavan wrote in a note to clients on Monday.
Deutsche Bank economists wrote to clients on Monday, adding they would finalize their views "after observing this week's developments."
The situation remains uncertain, and it will be up to the Federal Reserve to navigate the difficult balancing act of addressing inflation risks while preventing financial contagion.
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Posted on: 2023-03-14T11:57:26+05:00
