Interest rate cuts? No more hikes?
Thats not a typo... Analysts expect to stop raising interest rates as soon as next week...
Goldman Sachs' analysts on Sunday said they no longer expect the U.S. Federal Reserve to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March, in light of the recent stress in the banking sector.
Goldman previously expected a 25-basis-point hike in March.
U.S. regulators on Sunday said the failed Silicon Valley Bank's customers will have access to all their deposits starting Monday and regulators set up a new facility to give banks access to emergency funds. The Federal Reserve also made it easier for banks to borrow from it in emergencies.
Goldman analysts said they expected the measures taken by the regulators to provide substantial liquidity to banks facing deposit outflows and to improve confidence among depositors.
Goldman left unchanged its expectations for 25-basis-point hikes in May, June, and July, but said it saw considerable uncertainty about the rate hike path beyond March.
Japan’s top brokerage Nomura has reportedly also projected the Federal Reserve will cut interest rates next week and will halt quantitative tightening as policymakers evaluate financial stability risks in the wake of the Silicon Valley Bank collapse.
Nomura analysts had earlier forecast a 50 basis point rate hike by the Fed during its March meeting but now expect a 25 bps cut, stated a Reuters report, published by Yahoo Finance.
However, if the consumer price inflation print for February comes in higher, the central bank will find itself in a big dilemma. The question, then, would be whether to prioritize inflation fight and hike rates or hold rate hike for the time being till policymakers are able to clearly evaluate risks to financial stability.
Some relief did appear in the form of the February 2023 Survey of Consumer Expectations released by the Federal Reserve Bank of New York's Center for Microeconomic Data that showed inflation expectations decreased sharply at the short-term horizon. Median inflation expectations dropped by 0.8 percentage point at the one-year-ahead horizon to 4.2%, it said.
Banking and financial stocks have been taking a hard beating over the last few days as investors weighed-in the prospect of the crisis turning into a contagion. Market participants, however, also began considering the possibility of no rate hikes in the March Fed policy given the ongoing crisis.
As a result, major Wall Street indices closed mixed on Monday with the SPDR S&P 500 ETF Trust (NYSE:SPY) closing 0.14% lower and the Invesco QQQ Trust Series 1 (NASDAQ:QQQ) gaining 0.74%.
Experts have been calling for immediate short-terms steps by the government to limit any potential contagion. Former Treasury Secretary Lawrence Summers reportedly said that the government must take immediate steps to ensure depositors get their money back and should also inspect institutions that are struggling.
Warning: Next Fed meeting March 21-22
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