Just a few days ago, a debate was raging over how big of an interest-rate hike the Federal Reserve would deliver at its March meeting in the face of hotter-than-expected economic data.
Chairman Jerome Powell took markets by surprise last week when he suggested the Fed may need to raise rates higher than previously anticipated and pick up the pace of increases amid signs of broad inflationary pressures within the economy. The hawkish commentary prompted investors to re-evaluate their expectations for the meeting, with many ramping up the odds that the Fed approves a half-percentage point hike during its March 21-22 meeting.
But Wall Street no longer sees that as a possibility after the stunning implosion of Silicon Valley Bank on Friday roiled global markets and triggered fears of a broader financial meltdown.
The probability that the Fed pauses its rate-hike campaign next week rose to 28% on Monday, according to data from the CME Group's FedWatch tool, up from 0% just one day ago. About 71% of traders, meanwhile, are anticipating a typical quarter-point hike.
Goldman Sachs is among the notable Wall Street firms predicting the Fed will not deliver a rate hike at its meeting, citing "recent stress" in the financial sector. The firm previously expected a 25-basis point increase.
"In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22," Goldman economist Jan Hatzius said in a Sunday note.
Many economists expect the Fed will continue to raise rates next week, albeit at a slower and more cautious pace than it would if not for the collapse of SVB – a key lender to tech startups and venture capital firms. That's in part because federal regulators stepped in on Sunday evening to shore up the banking system and backstop all deposits at SVB.
"While the Fed has historically cut interest rates following major negative financial events, such as a bank failure, efforts by regulators to bail out SVB depositors and provide loans to struggling banks will reduce systemic risk and enable the Fed to continue raising interest rates in an effort to keep fighting inflation," said Richard Saperstein, chief investment officer at Treasury Partners.
Central bankers are in the midst of the most aggressive campaign since the 1980s to crush persistently high inflation. Although the consumer price index has slowly fallen from a high of 9.1% notched in June, it remains about three times higher than the pre-pandemic average. New inflation data that will be released Tuesday morning is expected to show the CPI climbed 0.5% over the course of February and 6.1% from the previous year, underscoring the pervasiveness of high consumer prices.
Officials slowed the pace of rate increases to a quarter percentage point during their meeting last month, lifting the benchmark federal funds rate to a range of 4.5% to 4.75%. That followed a half-point increase at their December meeting and four consecutive 75-basis-point moves before that. The central bank typically moves rates in quarter-point increments.
At the time, policymakers suggested that slower rate moves could allow them to better assess the impact that tighter monetary policy is having on the economy.
Powell last week stressed that incoming data – including the February jobs report and fresh inflation data on Tuesday – will play a big role in the Fed's decision during its upcoming meeting.
"We have some potentially important data coming up," Powell said. "Those will be important and we’ll scrutinize them… We have not made any decision about the March meeting."