Nomura Solely Believes Fed to Cut Rates by 25bps to Boost Confidence in Banking Sector

The crisis in the U.S. banking system has led to an anticipation in the market that the Federal Reserve will come to a conclusion to pause its rate hike despite inflation still well above its target range.


Goldman Sachs stated that the effort to bring inflation down to 2% target looks less urgent than it did last summer because year-ahead inflation expectations have fallen sharply and long-term inflation expectations have remained anchored, indicating that high inflation was never as deeply entrenched as some feared at the time.

Moreover, the Wall Street investment bank noted that the link between a single 25 basis point rate hike and future path of inflation is quite tenuous, and the Fed can always hike again at its next meeting, which would be only six weeks later, if appropriate. The central bank could send signals to tighten financial conditions even sooner if the situation improves quickly.


Meanwhile, Nomura is the only firm according to a Reuters poll that expected the U.S. central bank to cut rates as persistent inflation will likely be outweighed by the need to maintain confidence in the banking system.

Against the backdrop of the Fed and regulators to stop the bleeding in the banking system, Nomura expected a 25bp rate cut along with a halt of QT at the March FOMC meeting. The firm said that the ongoing financial stress was in large part caused by the rapid pace of rate hikes by the Fed. The central bank halting rate hikes and demonstrating a willingness to use monetary policy to contain financial stability risks may be necessary to restore market confidence in the banking system.

This 25bp rate cut would be unlikely materially support the banking sector, but a rate cut should send two strong message to the markets; 1) the central bank is ready to use monetary policy to contain financial stability risks and 2) the Fed is entering a phase of fine-tuning its stance on monetary policy.

In addition, Nomura expected the Fed to announce a halt of the quantitative tightening program.


According to CME FedWatch Tool, which tracks the likelihood that the Fed will change the Federal target rate at upcoming FOMC meetings (March), the probability for a 25bp hike is now 72.3% and the probability for a pause is 27.7%. Meanwhile, there is no indication for a cut at this meeting.