Market expectations are for the Federal Reserve later today to raise the federal funds target range by +25 bp to 5.00%-5.25%, the highest since 2007. The markets are also expecting the Fed to signal a pause in its rate-hike campaign, with tighter lending conditions and signs of a slowing economy suggesting inflation will cool in the months ahead.
The ongoing financial-market turmoil has bolstered speculation the Fed today will signal a pause in its aggressive rate hikes. Confidence in the U.S. banking sector has been shaken after First Republic Bank this week became the third U.S. lender to fail this year. The markets will also look to post-FOMC meeting comments today from Fed Chair Powell for clues as to the future direction of Fed policy.
With inflation remaining far above the Fed’s 2% target, today’s post-meeting comments from policymakers will likely say that they aren’t necessarily done with tightening policy. At the March FOMC meeting, Fed officials tweaked the policy statement to say that “some additional policy firming may be appropriate,” softening previous language that “ongoing increases” would be likely. JPMorgan Chase said the Fed may update its wording today to say that more rate increases will depend on how the data evolve.
Post-meeting comments from Fed Chair Powell today will be scoured for clues as to future Fed policy. Today will also be the first public appearance of a Fed official since the Fed published a report last Friday on its failure to adequately supervise the failed Silicon Valley Bank. With the failure of First Republic Bank this week and the unrelenting pressure on regional banks, a tightening of lending conditions due to the banking turmoil may help the Fed by tightening liquidity, even if the Fed pauses rate hikes after today’s expected 25 bp rate hike.
The resulting credit impact from the banking turmoil will prompt banks to tighten lending standards. Fed Chair Powell has estimated that the higher borrowing costs will be amplified by about 25 bp from the fallout of the banking turmoil. Nomura Securities said the banking turmoil “will likely be a key cause of reduced bank lending in the coming quarters, which we expect to generate notable headwinds.” While the Fed hasn’t explicitly predicted a recession, FOMC members at the March meeting forecast a sharp reduction in growth this year. The Fed has not forecasted a rate cut this year, but the markets think otherwise as fed fund futures are pricing in a -50 bp rate cut by year-end to address what is expected to be a weak U.S. economy.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
