Federal Reserve Board Chairman Jerome Powell speaks at a news conference following a two-day meeting of the Federal Open Market Committee, Wednesday, September 18, 2019, in Washington.
Patrick Semanski AP
Markets have changed their minds – once again – on what they think the Federal Reserve will do next week in relation to interest rates.
On a morning when more banking turmoil loomed and Wall Street stocks opened sharply lower, traders changed prices to indicate the Fed could hold the line when it meets on March 21-22.
The probability of no rate hike rose to as much as 65% on Wednesday morning, according to CME Group data. However, trading has been volatile and recent moves suggested an almost 50:50 split between no rate hike and a 0.25 percentage point move. For most of Tuesday, markets showed a strong possibility of a move higher.
Chairman Jerome Powell and his fellow Fed policymakers will resolve the issue of rate hikes by monitoring macroeconomic reports that continue to flow in, as well as data from regional banks and their share prices, which could provide greater clues to the health of the financial sector.
Smaller banks have come under severe pressure in recent days after the shutdowns of Silicon Valley Bank and Signature Bank, the second and third largest bankruptcies in US history. The SPDR Regional Bank ETF fell another 1.5% on Wednesday and is down more than 23% in the past five trading days.
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SPDR S&P Regional Bank ETF, 5 days
In a dramatic move, the central bank launched an initiative called the Bank Term Funding Program on Sunday evening. This will give banks the opportunity to exchange high quality collateral for credit so they can ensure operations.
Inflows to affected banks could be reflected in their share prices to indicate how well the Fed’s initiative is working to maintain confidence in the industry and keep cash flowing.
Central bank officials will also receive data in the coming days to see how actively banks are using the facility.
If banks use the BTFP extensively, it could indicate significant liquidity problems and thus act as a deterrent to rate hikes. The final public report on this data will be on Thursday, although the Fed will be able to monitor the program until the start of its two-day meeting on Tuesday.
Betting on which path the Fed will ultimately take followed a bumpy morning on Wall Street. Shares were significantly lower in early trade, with the Dow Jones industry average Minus more than 500 points.
Just as concerns about the health of the banking sector were fading, news broke that Credit Suisse may need a lifeline. Switzerland’s second-largest bank collapsed after a major Saudi investor said it would not provide more capital due to regulatory issues.
The slump came even as economic data seemed to lessen the urgency of controlling inflation.
The producer price index, a measure of wholesale prices for pipelines, unexpectedly fell 0.1% in February, according to the Labor Department. While markets often don’t pay much attention to the PPI, the Fed considers it a leading indicator of inflationary pressures.
On a yearly basis, PPI earnings fell to 4.6%, a big drop from January’s 5.7% reading, which has itself been revised lower. The PPI peaked in March 2022 at a rate of 11.6%; The February reading was the lowest since March 2021. Ex-Food & Energy, the core PPI was flat over the month, up 4.4% year-on-year, compared to 5% in January.
“The high probability of continued rapid disinflation in the core PPI is central to our relatively bullish view on the core [personal consumption expenditures] Inflation and ultimately Fed policy,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Markets don’t pay much attention to the PPI, but the Fed does.”
The PPI data coupled with a relatively tame CPI report on Tuesday. Markets last week priced in a possible half-point rate hike this month, but quickly pulled back.