Roller coaster for Fed forecasts after SVB bankruptcy

180 degree turn around the Fed: the bankruptcy of the SVB bank could slow down rate hikes, or even sound the death knell, when a stronger rise than expected was expected a few days ago.

“Recent developments significantly increase the likelihood that (the Fed) will refrain from raising rates on March 22” at its next meeting, Wells Fargo analysts said in a note.

They therefore expect rates to remain within their current range of 4.50 to 4.75%.

Because the bankruptcy in recent days of Silicon Valley Bank (SVB) and two smaller establishments, Signature Bank and Silvergate Bank, has shaken the banking world and, more broadly, global finance.

And these expectations mark a rapid and dramatic turnaround from last week. Fed Chairman Jerome Powell had just warned that inflation remained far too high, and that rates could rise more than expected.

The vast majority of market players then expected a strong increase of half a percentage point (50 basis points). A rebound from the previous one, only a quarter point (25 basis points).

– “More progressive approach” –

“The week started with Jerome Powell suggesting (…) an even more aggressive policy response and ended with the collapse of two mid-sized US banks”, SVB and Signature Bank, notes Neil Shearing, chief economist for Capital Economics, in a note.

And according to him, “the delays with which the policy (of the central bank) is effective is a reason to adopt a more gradual approach (…) from now on”.

Because the current priority of the Fed is to fight against inflation, 6.4% over one year in January, according to the CPI index, which refers. February data will be released on Tuesday morning.

To do this, it has been raising its main key rate for the past year, which increases the cost of credit to slow down consumption. With limited effect so far, however.

But the consequences of his actions take months to be fully felt. The red rag of the recession is thus regularly waved.

The Fed is ready “to tighten until something breaks. The collapse of SVB and the seizure of Signature Bank are signs that this is starting to happen,” commented John Canavan, economist for Oxford Economics.

– “Not to be too quick” –

It is therefore ultimately neither the inflation figures, nor those of employment, which could have the strongest impact on the policy of the Fed, but these bank failures.

And for the future, the Fed will not be able to raise its rates further “only if the financial markets and the banking system show signs of stabilization”, underline analysts at Wells Fargo.

Beware though: “Those who think the Fed could end its tightening cycle sooner due to current strains in the banking sector may be wrong,” warns Gregory Daco, economist for EY Parthenon, in a note.

Because if “recent developments will probably favor a rate hike” of 25 basis points next week, “we should not be too quick to rule out the possibility of a rate hike of 50 basis points”, according to him.

More than a third of market participants expect a break next week, for the first time since January 2022, according to CME Group’s assessment. The other two-thirds anticipate an increase of 25 basis points.

A wave of bank withdrawals caused the failure of three American banks last week, including SVB, which could no longer cope with massive withdrawals from its customers, and was closed on Friday by American authorities.

The latter announced on Sunday a series of measures to reassure individuals and businesses about the solidity of the American banking system and will in particular guarantee the withdrawal of all deposits from SVB.