From Breakingviews - Bank runs don’t change Fed’s focus on high prices
Plastic letters arranged to read "Inflation" are placed on U.S. Dollar banknote in this illustration taken, June 12, 2022. REUTERS/Dado Ruvic/Illustration
WASHINGTON, March 14 - The past two weeks have been a roller-coaster ride for interest rate forecasts. At the start of the month, most investors expected the U.S. Federal Reserve to raise rates by another 25 basis points later in March, bringing them to a range of 4.75% to 5%. Silicon Valley Bank’s collapse turned that harmony into discord. Some economists now expect Fed chair Jerome Powell to pause hikes, or even cut rates, to relieve stress on banks. With inflation still running too hot, such a reversal would do more harm than good.
Powell’s aggressive hiking cycle claimed its first banking victim last week, as rising rates and falling Treasury bond prices, coupled with poor risk management, dragged SVB into a. The federal government took emergency action to stave off other implosions, but SVB’s collapse cast a shadow over the Fed’s next rate decision. Economists at Goldman Sachs and Barclays scrapped their forecasts for a rate hike and now expect the central bank to hold rates steady when it meets on March 22.
Nomura went further, reversing its forecast for a half-point hike and projecting a quarter-point rate cut.
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