Goldman Sachs says the Fed will stop raising interest rates

Less than a week after Federal Reserve Chair Jerome Powell opened the door to another rate hike, traders closed it again amid a sudden burst of interest rates. financial distress in US regional banks.

Goldman Sachs Group Inc. economists. said they no longer expect the Fed to deliver a rate hike next week, even after US authorities moved to there is a crisis encouraged by exodus of depositors from Silicon Valley Bank and Signature Bank.

Two-year Treasury yields fell 18 basis points to 4.34%, heading for their steepest three-day decline since October 1987, when Black Monday equities beat markets. Just as that shock interrupted a tightening cycle, traders are now quickly returning to betting on Fed rate cuts for the second half of this year.

The risk of a banking crisis underscores the tension between the Fed’s efforts to cool the economy and tame inflation with growing concerns that a 4.5 percentage point rate hike within a year will trigger a recession and a loss of riskier assets.

Fed officials are entering a quiet period ahead of the March 21-22 meeting. Economists last week mostly expected a quarter-point increase at the meeting, with six predicting a half-point move.

Regulators are responding

US regulators were encouraged to act on Sunday to address the problem. The Fed established a new emergency facility to allow banks to pledge a variety of high-quality assets for money for a term of one year. Regulators also promised to fully protect even uninsured SVB depositors and relaxed terms for lending through the Fed’s discount window.

Those steps should provide “substantial liquidity to banks facing deposit outflows and to improve depositor confidence,” Goldman’s Jan Hatzius wrote in a note. However, he withdrew his earlier call for a quarter percentage point hike next week and said there was “great uncertainty” about the path forward.

The yield on two-year Treasury notes rose 5% on Wednesday, to the highest level since 2007, after Powell’s SIGNALING that a 50 basis point rate hike is on the table if future economic reports continue to arrive ahead of this month’s meeting.

The Fed is now seen as likely to raise rates by a quarter point next week. The Fed funds rate could rise to around 5.1% six months from now, the OIS curve shows, from the terminal rate of 5.74% priced in on Wednesday.

Eurodollar markets moved to bet on two Fed rate cuts for the second half of the year.

Swaps traders also cut their projections for six-month changes in central bank rates in eight major market economies, with Canada and Norway seen as holding policy on that. that time frame. Australia’s central bank now sees a better than a 75% chance of keeping rates on hold next month, OIS contracts show.

Flare Up

“We continue to look for a 25 basis point hike at next week’s meeting,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in a letter Sunday. “Even before the problems in the banking sector erupted, we thought a 50 basis point rate move was ill-advised, and we think that’s the case.”

Moving to a lesser extent – or even stopping the tightening campaign – will give Powell and his colleagues more time to assess whether more problems will arise in the banking system. A senior US Treasury official told reporters on a call on Sunday that there are some institutions that appear to have some similarities with SVB and perhaps Signature.

“It may be some time before the full ramifications of SVB’s collapse are apparent,” Tom Kenny and Arindam Chakraborty, economists at the Australia & New Zealand Banking Group, wrote in a note Monday. . “Front of mind for markets is the risk of contagion, worsening risk sentiment and potentially a wider financial crisis.”

Meanwhile, economic data is still pending. On Tuesday, Fed policymakers will get the latest reading on inflation, with the consumer price index for February due. Economists see the CPI rising 0.4% from last month, down slightly from the 0.5% gain in January.

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