Bank turmoil raises investor bets on big Fed rate cuts this year

Investors should federal reserve A big rate cut is slated for this year after the Credit Suisse trouble reignited panic over a wider financial meltdown.

Data from CME Group’s FedWatch tool, which tracks trades, showed the odds of the Fed cutting rates in May jumped to 19% on Wednesday afternoon, up from 0% the week before.

The odds are even higher in June, with about a quarter of traders expecting a rate cut of a quarter or half a point. Futures market pricing suggests the Federal Reserve will continue to cut rates throughout the year, dropping a full percentage point to 5% from a peak of 4.75%.

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Federal Reserve Chairman Jerome Powell speaks at a post-meeting press conference of the Federal Open Market Committee (FOMC) in Washington, DC on May 4, 2022. (Photo by Al Drago/Bloomberg via Getty Images/Getty Images)

Central banks are in the midst of their most aggressive campaign since the 1980s, trying to quell persistently high inflation.They have hiked rates eight times in the past year and were widely expected to approve another rate hike at their March 21-22 meeting before the bank turmoil began last week. The consumer price index has fallen slowly from a June high of 9.1%, but new data released Tuesday morning remains about three times than the pre-pandemic average.

Officials slowed the pace of rate hikes It rose by a quarter of a percentage point at its early February meeting, raising the benchmark Federal Funds Rate to a range of 4.5% to 4.75%. This followed his 0.5-point gain at the December meeting and his four consecutive 75-basis-point moves earlier. Central banks usually move interest rates in quarters.

Fed Chairman Jerome Powell surprised markets last week. Federal Reserve may need to raise interest rates Higher than previously expected, accelerating the pace of growth amid signs of broader inflationary pressures within the economy. The hawkish commentary has led investors to reassess expectations of the meeting, with many speculating that his Fed could approve his 0.5% rate hike at the March 21-22 meeting. increased.

but wall street We don’t see it as a possibility after Friday’s shocking Silicon Valley bank implosion roiled global markets. This marked the largest US bank failure since the 2008 global financial crisis.

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Expectations changed again on Wednesday after Credit Suisse said its biggest backer would not provide additional funds to banks.

Silicon Valley Bank

The Silicon Valley Bank (SVB) logo is seen through a rain-covered window in front of SVB headquarters in Santa Clara, California on March 10, 2023. (Justin Sullivan/Getty Images/Getty Images)

John Lynch, chief investment officer at Comerica Wealth Management, said: “The recent easing of inflationary pressures, combined with concerns about the banking industry, is why the Fed is discussing the possible end of the tightening cycle at its meeting next week. ,” he said.

While the European lender issue appears to be unrelated to the SVB, a flurry of issues has raised new concerns about the banking sector’s vulnerability in an era of high interest rates. Swiss regulators announced Wednesday afternoon that they would provide liquidity to Credit Suisse if needed.


Former Boston Fed President Eric Rosengren suggested Wednesday that he thinks the central bank should pause the rate-hiking cycle after two domestic bank failures and uncertainty over Credit Suisse. bottom.

Rosengren tweeted: “The financial crisis causes demand destruction. Interest rates should be suspended until

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