There have been major developments in the U.S. banking sector in the past few days. The Federal Reserve has shifted its monetary policy stance significantly, resulting in much higher expectations for a rate cut by December 2023—with market predictions now placing it at 100 basis points (BPS). This is an unexpected turnaround from earlier projections, which had the rate cut at only 25 BPS by the end of this year.
The U.S. economy and financial markets would face major disruption if the Federal Reserve cut rates by 100 basis points (BPS) by December, which is significantly different from its current stance. Therefore, in the coming months, it is essential to closely monitor economic data and changes in Fed policy for potential ramifications in these areas.
Following the collapse of Silicon Valley Bank, bond markets are pricing in rate cuts for this year and reduced expectations for future rate hikes. As a result, institutions such as Goldman Sachs and Barclays Bank have suggested that the Federal Reserve take a break during their next meeting. Angelo Kourkafas, the investment strategist at Edward Jones in St. Louis, reinforced this point, stating: “The Fed’s actions in backing up deposits are intended to restore confidence in the system, rather than offer stimulus or loosen conditions. However, due to recent events, tighter financial conditions have resulted; even though yields may have dropped, credit spreads have widened. Thus, we can see that the consequences of these incidents are already doing some of the Fed’s work for them.”
The Federal Open Market Committee (FOMC) will meet in seven days to discuss potential interest rate changes. The majority of analysts are expecting no rate hike as a result. In light of this, reports have also revealed that traders’ bets on the outcome are split between those predicting a 25 basis point increase and those anticipating no change. Investment director at Abrdn, James Athey, commented on the situation saying, “I think cuts will happen faster than anticipated by both the Fed and the market. This is only the start of a difficult period for corporations.”