Fed Rate Hike Expectations Downshifted After Silicon Valley Bank Collapse
The banking system is facing a crisis of confidence in the wake of the collapse of Silicon Valley Bank (SVB). The US Federal Reserve is now under pressure to ease the rate hikes it had previously planned in order to shore up confidence in the banking system. As a result, markets have downshifted their expectations for the path of the Fed’s anti-inflation rate hike campaign.
SVB’s collapse was caused by its heavy exposure to startups, whose deposits surged in 2021 amid healthy venture funding, but have lately been rapidly spending down their cash. SVB had invested heavily in US government bonds two years ago, when it had healthy deposit levels, but with a fall in US government bond prices as the Fed raised interest rates, the value of its investments dropped. At least two ways in which the Federal Reserve's hikes over the last year contributed to the downfall of Silicon Valley Bank can be identified. Due to the rate hikes, the bank's large allotment of long-term bonds, which formed a large portion of its assets, has decreased in value. The hikes have not only made all types of loans more expensive throughout the economy, but they have especially impacted the bank's clientele, who are mainly startups in the tech industry. These companies have relied on the low-interest rates and easy credit that has been available during the prolonged period of almost zero rates.
As a result of the turmoil in the banking system, Goldman Sachs on Monday said it does not expect the Fed to hike rates at all this month, though there were few, if any, other Wall Street forecasters who shared that view. It had been anticipated by the company that the Federal Reserve would raise rates by 25 basis points. Goldman Sachs stated in a note to clients on Sunday that due to the recent turbulence in the banking system, the Federal Reserve is unlikely to raise the rate at its March 22 meeting, and there is a great deal of doubt about what will happen afterwards.
The data from the derivatives exchange CME Group suggests that traders think there’s a roughly two-thirds chance there will only be a quarter-point hike and a roughly one-third chance there will be no hike. Financial markets no longer view the half percentage point increase as a viable option. Fed fund futures now price in a 40% of no change in rates at the March 22 meeting.
0. “Banking Chaos Could Prompt Fed to Slow or Pause Rate Hikes” Investopedia, 13 Mar. 2023, https://www.investopedia.com/banking-chaos-could-prompt-fed-to-slow-or-pause-rate-hikes-7254707
1. “Fed may hold rates steady because of Silicon Valley Bank collapse” USA TODAY, 13 Mar. 2023, https://www.usatoday.com/story/money/2023/03/13/fed-hold-rates-steady-silicon-valley-bank/11466540002/
2. “How the Fed's interest rate hikes led to SVB's collapse” Grid, 13 Mar. 2023, https://www.grid.news/story/economy/2023/03/13/how-the-feds-interest-rate-hikes-endangered-the-banking-sector-leading-to-svbs-collapse
3. “Fed pause? Market now pricing in a 40% chance of no hike in March” Seeking Alpha, 13 Mar. 2023, https://seekingalpha.com/news/3946740-fed-pause-market-pricing-in-a-40-chance-of-no-hike-as-yields-tumble-in-wake-of-svb
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