SUMMARY
- Last month, the Federal Reserve slowed the pace of rate hikes, increasing interest rates by 0.25%, following a 0.50% rate hike in December and three consecutive 0.75% hikes at the three prior meetings. In early March, following a series of strong economic data releases in February, expectations were for interest rates to reach a high of 5.44% in July this year, before dropping down to 5.31% at the end of 2023.
- However, following the collapse of Silicon Valley Bank (SVB) and the subsequent closure of Signature Bank (and the shaky future of First Republic Bank) over the last week, there is a deepening concern surrounding the financial stability of the U.S. economy. As a result, the implied Fed Funds curve has dramatically shifted downwards over the past week, with expectations for rates now to reach a high of 4.95% in May, and drop down to 4.24% at the end of 2023—almost a full percentage point lower than expected at the start of the month.
- There is a saying that the Fed hikes rates until something breaks, and many are calling the collapse and continued fallout of SVB the something that finally broke. At the next FOMC meeting, later this week, the Fed will need to find a fine balance between bringing still-high inflation back under control, without further disrupting the currently fragile state of financial stability.
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