Federal Reserve’s Path Is Murkier After Bank Blowup

The Federal Reserve’s decision on interest rates has become one of the hottest topics in the banking and financial sector. The central bank’s decision to raise interest rates last year to contain inflation has been successful to some extent. Still, the swift increase in interest rates has caused the collapse of three banks in just one week, which has left investors uncertain about what the Fed will deliver next.

The Fed’s Recent Interest Rate Increases

The Federal Reserve has rapidly raised interest rates to curb inflation since the 1980s. The interest rates were lifted above 4.5% from near zero a year ago to keep inflation in check. The central bank made four consecutive 0.75-point increases in interest rates last year before slowing to a half point in December and a quarter point in February.

Before this weekend, investors believed that the Fed would make a half-point increase at its meeting next week since job growth and consumer spending have proved resilient to higher rates. But now, after the wild weekend in finance, investors and economists no longer see that as a likely possibility.

The Downfall of Silicon Valley Bank and Market Turmoil

One of the most prominent lenders in the world of technology start-ups, Silicon Valley Bank, collapsed on March 10, triggering the U.S. government to intervene. However, the recent turmoil and risks it exposed could make the central bank more cautious as it pushes forward.

The risks of financial market turmoil have increased since the bank’s failure, which has made investors downgrade their interest rate forecasts. After Federal Reserve Chair Jerome H. Powell’s speech last week, investors had sharply marked their interest rate forecasts for 2023, with a tiny chance that rates would rise above 6 percent this year. But after the weekend’s wild ride in finance, they see a small move this month and expect the Fed to cut rates to just above 4.25 percent by the end of the year.

According to economists at J.P. Morgan, the current situation bolsters the case for a smaller quarter-point move this month instead of a half-point increase. “I don’t hold that view with tons of confidence,” said Michael Feroli, Chief U.S. Economist at J.P. Morgan, explaining that a move this month was conditional on the banking system’s functioning correctly. “We’ll see if these backstops have been enough to quell concerns. If they are successful, I think the Fed wants to continue on the path to tightening policy,” he added.

Goldman Sachs economists no longer expect a rate move, although they think the Fed will raise rates above 5.25 percent this year. In a statement on Sunday evening, they wrote that they “see considerable uncertainty” about the path of interest rates.

Related Facts

• The Fed had been raising interest rates rapidly to curb the most painful burst of inflation since the 1980s.
• Four consecutive 0.75-point increases were made by the central bank last year before slowing to a half point in December and a quarter point in February.

Key Takeaway

In conclusion, the failure of Silicon Valley Bank has left investors uncertain about the Fed’s next interest rate decision. With Goldman Sachs economists no longer expecting a rate move at all and investors downgrading their interest range forecasts, the path of the Federal Reserve has become unclear.