The market is witnessing a wild swing of rate hike expectations in these past few weeks, starting before Jerome Powell’s statement to the Congress to the sentiment after he did and the aftermath of the Silicon Valley Bank situation.
After a series of aggressive rate hikes last year, the market had hoped that the Federal Reserve would slow down its moves toward policy rates, expecting three hikes with 25 basis points each before starting to cut rates by the end of this year.
However, the mood and tone from the Fed’s chairman Jerome Powell to the Congress last week sent the market into a panic as he mentioned that the central bank will likely need to hike interest rates more than planned in reaction to recent strong economic data.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
After the event, the ceiling of the Fed funds rate rose from 5.25-5.50% to 5.50-5.75% with a speculation of 50bps hike in March and two 25bps hike at each meeting up to June. Some analysts were pointing to a terminal rate as high as 6.00%.
The turning point came last Thursday after the collapse of Silicon Valley Bank (SVB) after the sale of securities that led to a loss in earnings after taxes of US$1.8 billion, prompting waves of withdrawal from the bank. After the collapse, Signature Bank followed SVB in just two days.
Expectations for Fed’s rate hikes shrunk from a possibility of a 50bps rate hike in March to none as of Monday. A 25bps increase seems certain with the odds of 98.2% and a slight chance of no hike at 1.8%, according to the CME FedWatch Tool.
However, the momentum swung wildly in just 24 hours as the odds on Tuesday for a 25bps rate hike in March shrunk from 98.2% to 68.6% and the probability for a no hike rose to 31.4%.
On the analysis side, Morgan Stanley maintained its forecast for a 50bps hike, while JPMorgan and Evercore ISI expected 25bps hike. Goldman Sachs, Barclays, NatWest and PIMCO believed the Fed will pause the rate at 4.50-4.75%. On the flip side, Nomura expected 25bps cut and the end to Fed’s quantitative tightening.