There hasn’t been a blackout period ahead of a Federal Reserve decision quite like this one before.
Ordinarily, the more-than-one-week period — which limits the extent to which policy makers on the Federal Open Market Committee can speak to avoid any potentially market-moving comments — is a mostly quiet time for financial markets. This time around, banking-sector developments have upset expectations for interest rates more than one time ahead of the Fed’s policy decision on Wednesday.
That’s evident in the market’s pricing of the Fed’s most likely path forward (see chart below from Deutsche Bank). On March 8, before the collapse of California’s Silicon Valley Bank, expectations were moving toward an almost 6% terminal fed-funds rate — the level at which policy makers would be expected to end their rate hikes before cutting them again.
Then just a week later, markets began pricing in 100 basis points — or a full percentage point — of rate cuts by year-end after contagion fears triggered by SVB and the collapse of New York’s Signature Bank were exacerbated by woes at Switzerland’s Credit Suisse
CS,
The fed-funds rate target, currently between 4.5% and 4.75%, was seen as possibly dropping to 3.5% to 3.75%, or even lower, by the Fed’s final meeting in December.
As of Monday, traders had settled into another line of thinking: the idea of a 4.91% terminal fed-funds rate — similar to where expectations were in January — and the possibility that it could stay above 3% for all of 2024. Then on Tuesday, they adjusted their expectations for the terminal rate once again, to include a decent chance of something at 5% or higher by May.
Source: Bloomberg, Deutsche Bank
“As the FOMC begins their two-day meeting today it’s fair to say there’s plenty for the committee to discuss,” said Jim Reid, Deutsche Bank’s head of thematic research. “It’s also fair to say that the tone of their deliberations might have been quite different depending on which of the last eight business days it had been held since SVB was catapulted into global awareness,” he wrote in a note titled “A wild FOMC blackout period.”
On Tuesday, Treasury yields advanced, led by jumps in the 1-
TMUBMUSD01Y,
and 2-year rates
TMUBMUSD02Y,
as fed-funds futures traders factored in a 57.6% chance of another quarter-point hike in May after a similar-size move by the Fed on Wednesday. Meanwhile, U.S. stocks
DJIA,
SPX,
COMP,
finished higher.
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