Federal Reserve Changing Policy
I am often asked if the Fed has telegraphed certain actions, why wouldn't we invest based on that stated future action? The answer is simple; the Fed changes its view based on new data. Words do not necessarily guarantee a specific action.
Prior to the collapse of Silicon Valley Bank, there was a high probability that the Fed would increase rates by a minimum of 25 basis points. In fact, just two weeks ago many economists suggested that 50 basis points was more likely. But since government officials want to avoid the prospects of bailing out small and intermediate size banks, they may pause. The fear is more rate hikes will be a negative for these institutions.
So.......keep in mind that the words about future action from the Federal Reserve are not gospel and may change. In fact, they often pivot.
An adjustment in the Federal Reserve perspective was highlighted recently in a CNBC article. Excerpts are provided below:
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"Markets have changed their mind — again — about what they think the Federal Reserve will do next week regarding interest rates.
In a morning where more banking turmoil emerged and stocks opened sharply lower on Wall Street, traders shifted pricing to indicate that the Fed may hold the line when it meets March 21-22.
The probability for no rate hike shot up to as high as 65%, according to CME Group data Wednesday morning. Trading was volatile, though, and the latest moves suggested nearly a 50-50 split between no rate hike and a 0.25 percentage point move. For most of Tuesday, markets indicated a strong likelihood of an increase.
Chairman Jerome Powell and his fellow Fed policymakers will resolve the question over raising rates by watching macroeconomic reports that continue to flow in, as well as data from regional banks and their share prices that could provide larger clues about the health of the financial sector.
In a dramatic move Sunday evening, the central bank launched an initiative it called the Bank Term Funding Program. That will provide a facility for banks to exchange high-quality collateral for loans so they can ensure operations. Inflows to impacted banks could be reflected through their share prices to indicate how well the Fed’s initiative is working out to maintain confidence in the industry and keep money flowing."
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At the next Fed meeting we expect no rate hike. At most, we see a 25-basis point increase. With oil prices falling and the economy clearly slowing down, it's entirely possible the Fed takes a watch and sees perspective going forward before they take additional action.
