Economy

Fed’s calculus for rate hikes turned upside down after SVB collapse

Jerome Powell’s plan became as outdated as Mason jar decor.
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Imgflip/Neal Freyman

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Fed Chair Jerome Powell had a plan: He was going to continue hiking interest rates until inflation returned to typical 2% levels. But then Silicon Valley Bank collapsed, and that plan became almost as outdated as Mason jar decor.

Given the current fragility of the banking sector, some economists predict that Powell will change his strategy to put the health of banks above all other considerations.

  • Goldman Sachs, which previously projected a rate increase of 25 basis points at the Fed’s meeting next week, now expects no rate increase, citing “stress in the banking system.”
  • The Japanese bank Nomura made an even bolder prediction yesterday: a rate cut at next week’s Fed meeting.

Another rate hike next week is still the most popular bet—as of yesterday, traders were pricing in a 70% chance of a 25 basis-point increase, according to the CME FedWatch Tool. But the fact that we’re even talking about the Fed potentially pausing rate hikes shows how dramatically the conversation has shifted since last Friday, when the probability of a meaty, 50 basis-point hike was 40% (now it’s 0%).

Zoom out: The Fed already had a tough job trying to bring down historic inflation. But thanks to SVB’s implosion, it now needs to balance its fight against inflation with preventing even more banking chaos.

Looking ahead…the Fed’s path forward could get even murkier when the latest inflation report drops this morning.—NF

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Become smarter in just 5 minutes

Morning Brew delivers quick and insightful updates about the business world every day of the week from Wall St. to Silicon Valley.