WASHINGTON, March 14 (Reuters Breakingviews) - The past two weeks have been a roller-coaster ride for interest rate forecasts. At the start of the month, most investors expected the U.S. Federal Reserve to raise rates by another 25 basis points later in March, bringing them to a range of 4.75% to 5%. Silicon Valley Bank’s (SIVB.O) collapse turned that harmony into discord. Some economists now expect Fed chair Jerome Powell to pause hikes, or even cut rates, to relieve stress on banks. With inflation still running too hot, such a reversal would do more harm than good.
Powell’s aggressive hiking cycle claimed its first banking victim last week, as rising rates and falling Treasury bond prices, coupled with poor risk management, dragged SVB into a death spiral. The federal government took emergency action to stave off other implosions, but SVB’s collapse cast a shadow over the Fed’s next rate decision. Economists at Goldman Sachs and Barclays scrapped their forecasts for a rate hike and now expect the central bank to hold rates steady when it meets on March 22.
Nomura went further, reversing its forecast for a half-point hike and projecting a quarter-point rate cut.
Investors followed suit. Futures contracts have priced in a 35% chance of a March pause, according to the CME FedWatch tool, while a quarter-point hike has 65% odds. Just one week ago, markets saw a 70% chance of a half-point hike.
A rate cut, or even a pause, runs counter to the Fed’s broader mission. Prices across the U.S. rose 6% in the year through February, the Bureau of Labor Statistics said Tuesday. That is three times the central bank’s inflation target. Interest rates remain Powell’s best tool for countering price hikes. A premature reversal would damage both the U.S. economy and the Fed’s credibility.
It’s also unclear what a pause would achieve. The Fed already created an emergency lending program for banks to swap battered Treasury bonds for cash. The facility gives the Fed more leeway to raise rates, since future hikes won’t trigger losses in banks’ U.S. government bond portfolios in the same way they hit SVB’s holdings. Rebounding bank stocks suggest investors believe in the program.
The financial system’s wobbles are mainly harming failed banks’ executives and their investors. Rising prices, meanwhile, continue to hurt every U.S. household. Economists’ flip-flopping obscures a plain truth. Inflation remains much too hot for the Fed’s liking, and the central bank has more reason to repeat February’s 25-basis-point hike than to deviate from it.
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CONTEXT NEWS
The U.S. Consumer Price Index rose 0.4% in February, the Bureau of Labor Statistics said on March 14. That matched the median estimate from economists surveyed by Reuters. The measure also gained 6% year-over-year, down from the prior month’s 6.3% annual pace.
The Federal Reserve will make its next interest rate decision on March 22. Its last policy meeting concluded with the central bank lifting the federal funds rate by 25 basis points to a range of 4.5% to 4.75%.
