Stock investors are debating the Federal Reserve’s next moves in the wake of two bank collapses over the weekend. Many view the sudden collapse of Silicon Valley Bank and Signature Bank mostly as casualties of the Fed’s rate hiking campaign. While the government has set up a backstop to cover potential bank customer losses, bulls believe the Fed may be reconsidering how much tighter they can turn the screws.

Many on Wall Street have been warning that the Fed’s aggressive tightening campaign was inevitably going to “break something” but whether this is just the first crack to form or an isolated trouble area remains heavily debated.


Today’s Consumer Price Index (CPI) could certainly further influence Wall Street’s expectations for future Fed policy. Economists expect the gauge to show inflation slowed in February to a year-over-year rate of +6% versus +6.4% previously. The so-called “core” rate, which strips out food and energy, is expected to slow to +5.5% from 5.6% in January.

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If CPI shows inflation accelerated last month or otherwise comes in hotter than expected, it will obviously raise concerns that the Fed will need to keep pushing rates higher and run the risk of more collateral damage.

Banking sector 

The only other economic data today is the Small Business Optimism Index. On the earnings front, SoftBank will likely draw a lot of attention considering they are the single biggest backer in the tech startup space. According to Bloomberg, the Japanese firm serviced more than 40% of venture-backed technology and health-care companies that went public last year. There is a lot of debate as to whether the venture group will need to bail out some of those companies and what assets it may need to liquidate in order to do so. 

Bottom line, there has been a major shift in how Wall Street is thinking about the Fed’s next several moves. Last week the trade was thinking the Fed would hike rates by 50-basis points at its upcoming FOMC meeting (next Tuesday-Wednesday) and keep rates higher for longer as it battles inflation. Many traders and investors say that theory is now out the window as the Fed will be very apprehensive as they try not to further destabilize the banking sector.

At the same time, many inside the banking world worry that many regional banks will start to really tighten up on making loans and extending credit when they are somewhat uncertain about the stability of their deposits. 

If the banks tighten up, which many believe they will, that could really work to slow the US economy, which could ultimately make the Fed much more dovish in nature.

In fact, the trade is now a coin-toss on if the Fed will only hike by 25-basis points or not hike at all in its upcoming FOMC meeting. The trade now has the May FOMC meeting odds favoring “no hike” at all. here’s the real curve-ball, the market odds for the June FOMC meeting have now fallen back to favor “no hike” but with 17% odds that the Fed might now start cutting rates by June.

Last week, the market was giving 100% odds that the Fed would be over +5.00% before the second half of this year, now the odds have shifted and there’s talk the Fed might have to take on a much more dovish attitude, especially if the US economy looks like it is going to fall into a deeper recession.

Banking Sector and CPI Will Influence Fed’s Policy

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