After several days of turmoil in the banking sector, featuring the collapse of Silicon Valley Bank and the takeover of Credit Suisse by UBS, the European Central Bank decided to raise rates by 50 basis points at the meeting of its governing council on 16 March, with an aim to return to its target of 2% inflation. Attention has now turned to the Federal Reserve’s 22 March meeting.
“It’s a close call, but we expect a 25bp hike by the Fed today. Ultimately, [Federal Reserve chair Jerome] Powell’s primary goal is to restore investor confidence and a hold might signal a lack of trust in the financial system,” said an ING Think research article published on 22 March.
ING FX strategist Francesco Pesole added more detail. The US treasury is examining an extension of the Federal Deposit Insurance Corporation (FDIC) deposit guarantee--now at $250,000 per depositor, per insured bank, for each account ownership category--and “the Federal Reserve itself boosted money market liquidity via higher-frequency USD swap line operations,” noted Pesole. “Two straight days of gains in global equities tell us that investors have indeed turned tentatively more optimistic about the financial turmoil.” It will be important to see what the Fed gives as financial stability assessment and tools, as well as forward guidance such as dot plots (projections for interest rates).
An eye on regional banks, forward guidance
Simon Harvey, head of FX Analysis at Monex Europe, also made reference to uncertainty around First Republic Bank in his 21 March preview of the Fed’s meeting. Despite a $30bn injection of cash from large US banks, including JP Morgan Chase, to address liquidity concerns, the San Francisco-headquartered bank saw its share price drop over 65%, from $35.10 (€32.54) to $12.03 (€11.15) between 16 and 20 March.
“With First Republic's share price still tanking and suggesting a fourth US bank could fail in the space of ten business days, market pricing of tomorrow’s [the preview was published on 21 March] decision was a coin flip between a 25bp hike and a hold,” said Monex’s Harvey. “However, a recent stabilisation in conditions has led markets to become more confident in a Fed hike, in line with our expectations, but the overall path for US monetary policy thereafter remains in question. For that reason, it isn’t just the decision on interest rates that is important for markets tomorrow, but also the signal the Fed sends via the dot plot projection and Chair Powell's press conference.”
