The collapse of Silicon Valley Bank — and other institutions relying on long-term government bonds that plummeted in value due to the Fed’s rate hikes — has sparked predictions that the central bank will pause its rate increases.
Until the recent bank failures, that option wasn’t even on the table for Federal Reserve Chairman Jerome Powell, who has insisted that higher rates are needed to slow demand and cool inflation.
“While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient,” Goldman Sachs analysts wrote in a note to investors.
“We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now.”
Most Fed observers see that viewpoint as wishful thinking. Futures traders believe there’s an 87 percent chance the Fed hikes rates by 0.25 percentage points, according to the CME FedWatch tool.
In the meantime, the Fed has boosted its lending to ensure that banks stay solvent. Treasury Secretary Yellen has sought to assure investors that the financial system remains strong, and that regulators will protect depositors at struggling regional banks such as First Republic Bank.
“The situation is stabilizing,” Yellen said Tuesday.
The Hill’s Tobias Burns has a full rundown here on the rate hike debate.