Federal Reserve monetary policy makers possibly put in pause its fight against inflation next weekafter the turbulence in Credit Suisse renewed fears of a banking crisis and that a government report showed that the retail prices in the United States fell in February, according to the estimates of the operators.
On Wednesday, traders in futures linked to Federal Reserve interest rates valued at a percentage slightly above parity the possibility that the those responsible for monetary policy keep the reference interest rate between 4.5% and 4.75% in their next meeting of the days March 21 and 22.
The operators too removed previous bets that the Fed would raise rates above the 4.75%-5% range, and now they foresee cuts in the cost of credit in May or Junewith which the Fed’s official interest rate would end the year one percentage point below its current level.
The expectations about the next move of the US central bank have fluctuated sharply in recent days, after the sudden bankruptcy of two regional banks late last week will set off alarm bells about the health of the banking system and raise questions about how much longer the Fed can take what has been an aggressive fight against stubbornly high inflation.
Just a week ago, the Fed Chairman, Jerome Powell, fueled expectations of a half percentage point move at the next meeting, with the expectation in the markets that the interest rate would be between 5.5% and 5.75% in the coming months.
Following the failure of Silicon Valley Bank on Friday and Signature Bank on Saturday, the Fed created an emergency program to guarantee deposits and try to stop financial contagion.
This led to the futures traders to slash their rate hike expectationsonly to partially reverse on Tuesday after the release of a report showing that inflation is cooling too slowly.
By the end of Tuesday, the probability of a quarter percentage point rate hike in March was located around 70%and another rise of the same magnitude was likely in May.
Now, with the banking crisis seemingly reignited and bank stocks back under pressuretraders expect one more Fed hike, if it comes at all, and then a series of cuts, thus the rate would end this year in a range of 3.5%-3.75%.
“It is conceivable that we have seen the highest point of market interest rates in this cycle,” he said. John Lynch, Chief Investment Officer at Comerica Wealth Management.
Retail sales fell in Februarybut consumer spending continued to show underlying strength and US producer prices fell unexpectedly last month, with January price gains not as large as initially thought, offering some hopeful signs in the fight against inflation, separate US government reports showed on Wednesday.
However, a key inflation report released this week showed a 6% increase in the consumer price index last month compared to the previous year. This is the smallest gain in a year and a half, but still too high for the central bank to declare its job done. The Fed’s inflation target is 2%.
“The Fed has a very difficult decision to make at next week’s meeting: should it keep interest rates unchanged after the collapse of the SVB to shore up market confidence or, with core inflation sticking, should it keep uploading them?” he said. Paul Ashworthchief North American economist at Capital Economics, which for now still favors a quarter-point hike.
Source: Ambito
