Monex Europe: 25bps is looking more likely, but at what cost?

Monex Europe: 25bps is looking more likely, but at what cost?

Interest Rates Fed
Rente (03)

By Simon Harvey, Head of FX Analysis at Monex Europe

Fed pricing has shifted dramatically over the past fortnight. Following Powell's testimony to Congress just two weeks ago, overnight index swaps were pricing an 70% probability of a 50bp hike, but after a softer jobs report in February and rising concerns over Silicon Valley Bank's viability, expectations of the Fed's next steps quickly collapsed.

With financial stability concerns front and centre after SVB was put into receivership, it wasn't just the March meeting that was called into question. Rate cuts started to be priced in as soon as the June meeting, even after the FDIC and the US Treasury joined the Fed in backstopping liquidity within the banking system and trying to install confidence within the financial system.

Only 24 hours ago, with First Republic's share price still tanking and suggesting a fourth US bank could fail in the space of ten business days, market pricing of tomorrow's decision was a coin flip between a 25bp hike and a hold. However, a recent stabilisation in conditions has led markets to become more confident in a Fed hike, in line with our expectations, but the overall path for US monetary policy thereafter remains in question.

For that reason, it isn't just the decision on interest rates that is important for markets tomorrow, but also the signal the Fed sends via the dot plot projection and Chair Powell's press conference. While it will be a fine line to walk, we expect the Fed to continue to signal a marginally hawkish message on rates while leaving financial stability concerns to supplementary measures. However, this outcome is dependent on market conditions over the next 24 hours.