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On Thursday, market participants appeared to have leaned firmly towards a 25 basis point rate hike by the Federal Reserve at its next monetary policy committee meeting.
The recalibration of expectations has been fueled by the recent turmoil in the financial sector and the decision of the European Central Bank (ECB) to raise rates by 50 basis points. The ECB move came amid calls for central banks on both sides of the Atlantic to rein in policy tightening in light of the banking crisis.
Prior to the release of the ECB decision today at 09:15 ET, markets were pricing in a 56.8% probability of a 25 basis point hike by the central bank next week, according to the CME FedWatch tool. The probability of not raising was 43.2%.
After the ECB decision was released, the odds changed significantly and skewed further in favor of 25bp on the day. As of 1745 ET, the probability of a 25 bp increase was almost 80%, while the probability of no increase was around 20%.
“The Fed is likely to echo the ECB’s message that inflation is too high, but will use the necessary tools to provide liquidity to troubled banks. This will clear the way for the Fed to raise rates by at least 25bp and signal more upside to come,” Michael Kramer of Mott Capital Management told Seeking Alpha on Thursday.
Expectations have also been skewed towards a 25bp hike by the Fed as traders place bets that the central bank would avoid higher rate hikes to protect financial stability in light of the Signature Bank (SBNY) collapse. ) and Silicon Valley Bank of SVB Financial (SIVB). . Credit Suisse’s (CS) woes have added to the concern.
ECB President Christine Lagarde, in her post-policy press conference today, emphasized that inflation remained too high and the central bank would continue to take a data-driven approach. When asked about the banking sector, he said that policymakers were “closely monitoring current market tensions” and were “ready to respond as necessary to preserve price stability and financial stability in the euro area.” “.
“In the past, the Fed has made it very clear that the goal is to hit its mandatory 2% inflation target. One can easily argue that there is plenty of liquidity in the overall system, with more than $2 trillion going into the Fed. reverse repo facility daily. Now the new Bank Term Funding Program (BTFP) can also be a source of liquidity if needed for banks,” said Mott Capital’s Kramer.
Last weekend, the Fed moved to allay fears about the stability of the financial system following the collapse of Silicon Valley Bank by introducing the BTFP. Under the new program, the central bank would offer loans of up to one year to eligible banks, savings associations, credit unions and other depository institutions.
JPMorgan’s Nikolaos Panigirtzoglou in a research note on Wednesday said the Fed’s use of the BTFP would likely be large.
“For example, just looking at the uninsured deposits of the six US banks with the highest ratio of uninsured deposits to total deposits (all six are regional US banks), we get $460 billion Panigirtzoglou said.
“The greater the use of BTFP, the greater the injection of reserves by the Fed and the greater the liquidity relief for the US banking system,” he added.
More about the banking crisis
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