With rising inflation and a banking crisis in hand, it will be important to see what the Fed decides to do in the upcoming FOMC meet.
Jerome Powell, Fed Chair in his speech on 7th March said US inflation has moderated since the middle of last year but remains well above the FOMC's longer-run objective of 2 percent. He added that although inflation has been moderating in recent months, the process of getting it back down to targeted levels will be longer and is likely to be bumpy. Adding to it, the latest economic data is stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.
In line with Powell’s indication, economists expect another rate hike for the upcoming Fed meet on March 21 -22. Madan Sabnavis, Chief Economist at Bank of Baroda says “Fed will continue to increase interest rates in the next policy and expect 25 bps hike. Given that employment remains tight, can look at 50-100 bps increase from the present levels.”
Along with keeping inflation and employment numbers in check, the recent failure of two banks will be kept in mind when the FOMC meets next. The US Government has clarified to taxpayers that their money shall not be used to bail out Silicon Valley Bank and Signature Bank, though deposit holders will be protected.
Sabnavis feels larger banks will largely remain unaffected and most will need a reassessment of their portfolios. He says “there may not be a contagion even in the USA as the larger banks have a more diversified asset and liability book. However, niche banks which have concentration on either sides would need to reassess their position.”
If there are signals given that the foot still remains on the pedal, markets could continue their jitteriness. What also needs to be seen is how the RBI reacts to this, given that another 25 bps hike is expected in the next RBI's Monetary Policy Committee meeting.
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