However, the collapse of two commercial banks – Silicon Valley Bank and Signature Bank – changed things overnight and has created a lot of uncertainty around the policy actions likely to be taken by the Fed.
“We think the bar for the Fed to raise rates by 50 bps (instead of 25 bps) in March has become higher in light of the recent banking sector liquidity issues,” Nomura Financial said.
The other reason triggering mixed expectations is the recent comments by US Fed Chairman Jerome Powell.
In his recent testimony, Powell reiterated that the FOMC will continue tightening its monetary policy measures, and would be open to increasing the pace of rate hikes if data suggests that additional measures are required to tame inflation.
US headline CPI inflation and core CPI inflation slowed from 6.4% YoY and 5.6% YoY, respectively, in January to 6.0% YoY and 5.5% YoY in February, both in line with consensus expectations.
Ramit Arora, Co-founder and President, Biz2Credit expects the Fed to hike policy rates by 25 bps, pegging the terminal rate in the range of 5.25% to 5.5%. “We believe that the Fed would prioritize addressing inflation over other idiosyncratic issues that erupted recently,” Arora said.
But according to Jefferies’ Global Head of Equity Strategy Christopher Wood, Fed’s next rate hike might be dependent on how the stock prices move.
“Probably the best clue to what the Fed does at the next meeting on 22 March is how markets behave in the interim, given the Fed’s obsession with financial conditions,” Wood said.
He further said the more calm is restored following the panic selling of bank stocks in recent days, the more likely the Fed is to announce another 25 bps rate hike, whereas if risk-off continues a pause seems much more likely.
Meanwhile, the CME FedWatch Tool shows that traders are now pricing in a 18% chance of a pause in rate hike.
While inflation remains the epicenter of policy actions, it looks like the pressure on the Fed is to bring in financial stability more than macroeconomic stability at this juncture.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)