American banks will be paying especially close attention to the Federal Reserve’s interest-rate decision on Wednesday, as the collapse of Silicon Valley Bank (SVB) continues to reverberate through financial markets.
The majority of futures traders predict the Fed will increase its benchmark lending rate by 25 basis points to a range of 4.75-5.00 percent, according to CME Group.
That would be in line with the size of the US central bank’s previous rate hike in February, and mark the ninth increase since it began tightening monetary conditions last year in a bid to tackle rising inflation.
But despite these efforts, price rises remained stuck well above the Fed’s long-term inflation target of two percent.
SVB’s collapse triggered a squeeze on banking stocks around the world that led to the swift demise of two other American banks and the merger of Swiss investment bank Credit Suisse with regional rival UBS.
The combination of hot economic data at the start of the year and the uncertainty in the banking sector has led most analysts to predict the Fed will continue with a more modest hiking cycle than was previously predicted.
“After the recent news, the recent developments in the financial markets, we now see a kind of risk to both sides,” Stephen Juneau, senior US economist at Bank of America Global Research, told AFP.
“We’re still looking for a 25 basis point hike in March, May, and June,” he said.
Treasury Secretary Janet Yellen said Tuesday that the US banking sector was “stabilizing” after the recent failures of SVB and Signature Bank.
But she conceded that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Yellen’s comments underscored a more positive start to the week for US stocks, which have seen modest gains since Monday.
The VIX — Wall Street’s favorite volatility gauge — saw its biggest two-day decline since May as some of the fear of further contagion dissipated.
The challenge on Wednesday for Fed Chair Jerome Powell will be to convey the message that the banking system has turned a corner while continuing to confront inflation.
“The Fed will need to emphasize that it has a dual mandate of full employment and stable prices, with the latter nowhere close to being met,” Oxford Economics’ chief US economist Ryan Sweet wrote in a note to clients.
It is likely to be “a bit more dovish” in the language that accompanies the decision, Juneau from Bank of America said, adding he expects the US central bank to reinforce its confidence in the banking system in the statement.
The Fed will also update its GDP growth and interest-rate projections on Wednesday.