The crisis reverses expectations about rate hikes in the US.

The crisis reverses expectations about rate hikes in the US.

The collapse of Silicon Valley Bank (SVB), Silvergate and Signature reversed market expectations regarding an acceleration in the pace of rate hikes by the Federal Reserve (Fed). Now, analysts and investors expect the Fed to ease or even suspend increases at the March 22 meeting, at least until financial conditions stabilize and fears of widespread contagion from the banking crisis unleashed in the United States allay.

Such is the case of Goldman Sachs analysts, who until last week expected a rise of 25 basis points at the next meeting of the Fed’s Monetary Policy Committee, but now said they no longer expect the entity chaired by Jerome Powell raise interest rates this time. And they raised a scenario of uncertainty about the path to follow further.

Nomura Securities specialists went further. “In reaction to looming risks to financial stability, we now expect the Fed to cut rates,” economists Aichi Amemiya and Jacob Meyer wrote in a note Monday. “We also expect the Fed to stop quantitative tightening (which is nothing more than reducing its balance sheet to withdraw money from the economy),” they added, noting that “ending QT should help keep the quantity of larger reserves than would otherwise be the case.

“The threat of a systemic disturbance in the banking system is small, but the risk of stoking financial instability could well encourage the Fed to opt for a minor rate hike at the next meeting,” said Bob Schwartz. , economist at Oxford Economics.

The change in expectations regarding next week’s decision was reflected in a weakening of the so-called “super dollar”. The dollar index (DXY), which measures the performance of the US currency against six other currencies, was down 0.59% as yields on two-year Treasury bonds plummeted. The two-year note’s return plunged 57.2 basis points to 4.016%, its biggest daily drop since the Black Monday crash of 1987.

Source: Ambito

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