Will the Fed raise interest rates this month? That’s the question on many investors’ minds, and recent events have added a new layer of uncertainty to the answer.
Goldman Sachs analysts had previously predicted that the Federal Reserve would raise interest rates by between 25 and 50 basis points following its meeting later this month. However, they have since revised their prediction, stating that they no longer expect a rate hike due to recent stress in the banking system caused by the rapid collapse of Silicon Valley Bank.
According to the CME Group, the Fed Funds Futures market has seen its highest trading volume in months.
The Treasury Department has announced that regulators will step in to ensure that all deposits at Silicon Valley Bank, including funds not covered by the federal deposit insurance, will be safeguarded. A similar rescue package was also announced for depositors at the previously crypto-focused Signature Bank, which was also shut down and taken over by regulators on Sunday.
Despite these developments, the upcoming Consumer Price Index (CPI) report for February carries significant weight. Fed Chair Powell had previously testified about the possibility of raising rates by 50 basis points in March’s FOMC meeting, making the CPI report a crucial factor in determining whether the Fed will raise rates or not.
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Analysts predict a 0.4% rise in headline CPI for February, with core CPI expected to increase by the same rate as January at 0.4%. However, the swaps market and Cleveland Fed project higher inflation rates for February’s CPI report than analysts’ estimates. Over the past few weeks, the swaps market and bond market have consistently raised their inflation outlook, which could potentially lead to upward inflationary pressure.
Moreover, the core-services ex-shelter remains sticky, and goods prices are starting to rise again. This creates a problem for the Fed, as it could add to inflationary pressure. As a result, the market has become increasingly nervous, as seen in the higher level of implied volatility for the S&P 500.
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If the CPI report indicates elevated and sticky inflation, the market may need to adjust, implying that interest rates may need to rise further. This could put the Fed in a tough spot as they try to balance the need for higher rates to curb inflation against the potential negative impact on the economy.
The bottom line: While the collapse of Silicon Valley Bank has shifted the outlook for interest rates, the upcoming CPI report continues to remain a crucial factor in determining the Fed’s next move. The market will be closely watching the report and the Fed’s subsequent actions to gain insight into the future direction of interest rates.
