Expectations grow for what the Fed will do with rates: will it rise, fall or maintain?

After the US inflation data, many analysts began to make their reports and modify their economic outlook.

Analysts from Grupo Financiero Banorte explain that the bank’s bankruptcy was mainly due to the fact that it had bought long-term Treasury bonds before the rate hike cycle began. As rates increase, the price of bonds falls.

“Because SVB made losses of 1.8 billion dollars after the liquidation of part of its fixed income portfolio and saw the need to go to the market to raise capital, the confidence of depositors was lost, who made massive withdrawals in a short time. time”, says Gabriela Siller, director of Economic and Financial Analysis at Banco Base.

This event has led markets and analysts to see the possibility that the cycle of rate hikes could end early and, even this year, interest rate cuts could begin.

“Markets are now pricing in a 40% probability that the tightening cycle has come to an end, keeping the range for Fed funds at 4.50%-4.75% against a 25bp hike in March (60%)”Banorte analysts said.

“However, the market now anticipates cuts of almost 100 basis points for the remainder of the year (starting in July), in stark contrast to a previous scenario of keeping rates high for a long period of time,” they noted.

This financial group maintains its expectation that the Fed will increase rates by 25 bp in its decision on March 22, although “our conviction on this scenario has been strongly reduced.”

Following the collapse of SVB, economists at Nomura Securities are even considering the possibility that The Fed will cut rates at its meeting next week. and shrinking its balance sheet, as the market sell-off suggests the central bank needs to do more to restore confidence in the financial system, according to Nomura.

“In reaction to looming risks to financial stability, we now expect the Fed to cut rates,” Nomura said in a note cited by Bloomberg.

This morning, it was announced that inflation in February in the United States was at an annual rate of 6.0%, in line with expectations and being its lowest level since September 2021. With the February data, there are eight consecutive months that annual inflation shows a downward trend, from the June peak of 9.1%.

Core inflation stood at 5.5% per year, decreasing for the fifth month in a row and being its lowest level since December 2021.

“The market is speculating that the Federal Reserve could conclude the cycle of interest rate increases early, after the publication of inflation in February, which was in line with expectations,” said Gabriela Siller.

Jorge Gordillo Arias, director of Economic and Stock Market Analysis at CIBanco, observes that the monetary authorities of the United States want to toughen their policy to control inflation, although now there is speculation that the Fed will wonder if it is already too tight.

“The financial market and a growing number of analysts believe that for now Fed officials will give priority to financial stabilityinstead of inflation, until concerns about financial stability abate,” he said.