SVB adds new wrinkle to FOMC meeting

What a difference a week makes. The Federal Open Market Committee meets next week and after the employment report, the odds of a 50-basis point rate hike soared.

With the collapse of Silicon Valley Bank and Signature Bank, the market is now expecting a 25 basis point hike, or perhaps a pause.

After SVB’s failure, “the 50-basis point probability plunged and now the market is pricing in a 25-basis point hike as more likely,” said Tony Welch, chief investment officer at SignatureFD. “Also, the chances for a June/July hike fell.”

“Rather than mistakenly using the 1970s as a reference saying, ‘history has taught us to not let up too soon,’ the Fed would be better served recalling [the Fed Chair Alan] Greenspan’s long slow series of rate increases that allowed banks time to adjust as rates increased and avoid this type of banking crisis,” said Bryce Doty, senior vice president at Sit Investment Associates.

The Fed, he said, has an opportunity to now “pause given the fed funds is at a positive real rate when using a more accurate measure for housing.”

“Under normal circumstances, the strength of labor market and inflation data since the turn of the year would likely have prompted the Fed to hike rates by 50bp at its March 21-22 meeting,” said Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets, a member of the Shadow Open Market Committee. “However, given recent developments, we expect the Fed to opt for the more conservative option and deliver a 25bp hike in March as it assesses the full extent of the fallout in the banking sector.” 

But, Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting, said the bank failures should not “distract the Fed from its primary objective of getting inflation down.”

He noted, “you still have persistent high inflation,” and in his opinion a half-point rate hike would be the correct call, but he’d understand a “quarter-percentage point if it feels it needs to temper the markets and investors in light of bank failures.”

Given the lag with which monetary policy adjustments work, Welch said, “inflation is likely to continue to soften.”

The bank failures “muddy the waters a lot” for the Fed, noted David Petrosinelli, senior fixed-income trader with InspereX. Economic data “is just going to get lost in the noise of what’s going on with Silicon Valley Bank and Signature,” he said, which increases the uncertainty about what the Fed will do.

But, he doesn’t believe the Fed will pause. “I think that’s really going to be a tough sell for the market,” especially with CPI showing inflation is still higher than the Fed would like.