WHAT’S A FED TO DO?
The Fed’s resolve to continue to hike interest rates to fight off inflation was tested at the March 21-22 FOMC meeting. High profile bank failures, the first in decades, sent markets into a spiral last week and Monday’s markets remained skittish despite the Fed and FDIC stepping in to provide a backstop last Sunday evening. This week, it has been almost as if there had been no bank meltdowns or rescues at all….
What will the Fed do this week? Stay the course on rate hikes, moderately at 25bps, and signal that the Fed will keep an eye on developments in the bank sector, while continuing to at least attempt to moderate inflation.
GOING FORWAD…Will the Fed stay the course and continue its Fed hike run? There is a lot at stake in terms of the fragility of the banking system at the moment, prospects of a recession in late 2023/early 2024. That said, the equity markets have shaken off the bank crisis and recovered strongly since the SVP debacle.
Our view is the Fed will continue to hike rates albeit in a more nuanced fashion, with a narrative that continues to suggest a close eye will kept on the overall state of the financial ecosystem, but their resolve to tamper down inflation remains intact. Expect 25bps this week.