Bank failures and slowing inflation could lead the Fed to cool (or even pause) rate hikes

Wednesday, March 15, 2023 by Snacks
Considering a Pow-se? (Liu Jie/Getty Images)

Considering a Pow-se? (Liu Jie/Getty Images)

J. Powell may need an energy drink… or some chamomile. It’s only Wednesday, but it already feels like next Wednesday. A lot’s happened in the past week that could influence the Fed’s rate-hike decision on March 22. Three banks collapsed (including the second-biggest bank failure in US history) and the February inflation report came out yesterday.

  • Top line: The pace of inflation cooled for the eighth straight month (good), but it’s not slowing as fast as the Fed would like (not so good).

  • No surprises: US consumer prices were up 0.4% for the month and 6% for the year, as expected. Energy dropped, but housing costs soared.

  • Reaction: Stocks popped after the release, and traders priced in an 85% chance that the Fed will hike rates by 25 basis points (down from 50 last week).

Seeing the vault half full… Silvergate, Silicon Valley Bank, and Signature Bank all collapsed this month. US regulators swooped in with extraordinary measures to guarantee that depositors at SVB and Signature would have access to their funds. Three bank failures in one week may not seem amazing from an economic perspective, but some investors think it could actually be bullish for markets.

  • Bull case: Some now expect that bank failures will pressure the Fed to cool on rate hikes. Some Wall Street firms are even predicting that Powell will pause hikes (#Pow-se). Goldman Sachs said it no longer expects any hike on March 22 “in light of recent stress in the banking system.”

Panic could force the Fed’s hand… to cool its hiking crusade. The Biden admin and US regulators seem willing to do just about anything to prevent a banking crisis. And while the Fed wants to temper sticky inflation and the hot labor market, it really wants to avoid a crisis. The aggressive interest-rate environment contributed to bank failures and has been one of the main causes of the stock market’s woes.

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