Something went wrong, but the Fed is still expected to raise interest rates.

When the Federal Reserve starts raising interest rates, it usually keeps doing so until something breaks, according to Wall Street consensus.

Therefore, with the second and third-largest bank failures in history occurring in the last few days, and fears of more to come, it would appear to qualify as major breaking and cause the central bank to back off.

Not so quickly.

Notwithstanding the failures of Silicon Valley Bank and Signature Bank in recent days, which required regulators to intervene, markets anticipate the Fed to maintain its inflation-fighting efforts. Rising bond yields aided SVB’s downfall, as the bank faced $16 billion in unrealized losses from held-to-maturity Treasurys that had lost principal value due to increased rates.

Yet, the spectacular events may not even be considered breaking in the collective Wall Street mentality.

“No, it doesn’t,” LPL Financial’s chief global strategist Quincy Krosby said. “Is this enough to qualify as the kind of rupture that would have the Fed pivot? The market as a whole does not believe so.”

While market pricing was erratic on Monday, the bias was toward the Fed continuing to tighten monetary policy. According to a CME Group estimate, traders expect the Federal Open Market Committee to raise interest rates by 0.25 percentage points when it meets March 21-22 in Washington, D.C. Markets expected a 0.50-point shift last week after Fed Chair Jerome Powell indicated the central bank was concerned about recent hot inflation readings.

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Goldman Sachs, pondering a reversal, said on Monday that it does not expect the Fed to raise rates at all this month, but few, if any, other Wall Street analysts agreed. Bank of America and Citigroup both expect the Fed to raise interest rates by a quarter-point, followed by a few more.

Furthermore, while Goldman believes the Fed will skip a hike in March, it still expects quarter-point hikes in May, June, and July.

“We believe Fed officials will prioritize financial stability for the time being, perceiving it as the current problem and rising inflation as a medium-term problem,” Goldman said in a letter to investors.

According to Krosby, the Fed is likely to explore deferring an increase.

The FOMC meeting next week is significant because it will not only issue a rate decision but will also update its future estimates, including GDP, unemployment, and inflation.

“I’m sure they’re talking about it. The question is, will they be concerned that this fosters fear?” She stated. “They should indicate [before the meeting] to the market that they’re going to halt, or that they’re going to continue combating inflation. This is all up for debate.”

Controlling the message According to Citigroup economist Andrew Hollenhorst, pausing — a phrase largely disliked by Fed officials — now would send the wrong message to the market.

After months of dismissing growing costs as a “transitory” result of the Covid epidemic, the Fed has worked to reestablish its credentials as an inflation fighter. Powell has stated repeatedly that the Fed will remain on course until it achieves sufficient progress toward its 2% inflation target.

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Citi anticipates the Fed raising its benchmark funds rate to a target range of 5.5%-5.75%, up from the current 4.5%-4.75% and well above market pricing of 4.75%-5%.

“Fed policymakers, in our opinion, are unlikely to pivot at next week’s meeting by stopping rate hikes,” Hollenhorst wrote in a client letter. “Doing so would entice markets and the public to believe that the Fed’s commitment to battling inflation is only in effect when there is any turbulence in financial markets or the real economy.”

Bank of America said it is “vigilant” for evidence that the current banking crisis is expanding, which might modify the outlook.

“If the Fed is effective in containing recent market volatility and ringfencing the traditional banking sector,” Michael Gapen, BofA’s senior US economist, told clients. “Our monetary policy outlook is always data-driven; at the moment, it is also contingent on financial market concerns.”

Powell has also underlined the necessity of using data to identify where he wants to guide policy.

This week, the Fed will receive its final look at inflation measurements when the Labor Department issues the February consumer price index on Tuesday and the producer price index on Wednesday. According to a New York Fed survey released on Monday, one-year inflation forecasts fell over the month.

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