• Bank collapse causes market turmoil
• Fed takes action
• Will interest rates still rise?
Crisis at Silvergate Capital, SVB Financial Group and Signature Bank
After the troubled crypto bank Silvergate Capital announced its voluntary liquidation last week, the SVB Financial Group, which specializes in start-up financing, also reported an impending loss in the billions. The attempt to flush capital into the coffers by offering new shares failed. The financial house was finally placed under state control. All of the bank’s insured deposits were transferred to a new special purpose entity, the US government announced. The Signature Bank also fell victim to the bank earthquake at the weekend and was closed.
US Federal Reserve reacts to fears of new banking crisis
The fear of a new banking crisis is raging on the market, as the events surrounding the financial institutions are reminiscent of the beginnings of the global financial crisis between 2007 and 2008, when the investment bank Lehman Brothers, previously considered “too big to fail”, had to file for bankruptcy. The prices of bank shares have been under considerable pressure at times in the last few days – regardless of whether they are financial companies from the USA or Europe. In cooperation with the US Treasury Department and the deposit insurance company FDIC, the US Federal Reserve is now working to calm the tense mood. In a joint statement, the authorities said the US banking system remains resilient and on solid ground. However, action must now be taken to protect the US economy. “The taxpayer will not incur any losses related to the resolution of Silicon Valley Bank,” the statement said. However, the priority is to protect depositors, not to rescue the affected banks, as a high-ranking employee of the Ministry of Finance emphasized.
Consequences for rate meeting?
But what are the consequences of the bank crash for the meeting of monetary authorities next week? In February, the US Federal Reserve raised interest rates by 0.25 percentage points to a range between 4.5 and 4.75 percent. It is unclear to what extent recent events will affect the decision in March. If it was previously assumed that the Federal Open Market Committee (FOMC) would raise the key interest rate again by 0.50 percentage points, the cards are likely to have been reshuffled. Strategists at the major bank Goldman Sachs said in a customer note, which is available to the news agency “Reuters”, that they expect a deviation from the previous interest rate policy. “Given the pressure in the banking system, we no longer expect the FOMC to issue a rate hike The agency quotes the analysts as saying. Afterwards, however, the central bankers are likely to resume their strategy if the Goldman experts have their way: “We expect the FOMC to raise interest rates by 25 basis points in May, June and July raise is left unchanged and now expect a final rate of 5.25 to 5.5 percent, although we see significant uncertainty as to the path.”
The ECB is also likely to pause rate hikes
Interest rates are also likely to stagnate in Europe for the time being, as Sebastian Dullien from the Institute for Macroeconomics and Business Cycle Research (IMK) explained to Reuters. The Scientific Director also expects the Fed to stand still at the next rates meeting. And the interest rate policy of the European Central Bank should also be paused at the moment. “In fact, the events in the US should move the ECB to a slightly slower pace,” said Dullien. “In addition, with lower US interest rates, a slightly lower ECB interest rate is enough to keep the euro exchange rate stable.” The key interest rate decision by the ECB is already due for tomorrow, Thursday. At the last meeting in early February, ECB President raised Christine Lagarde and her colleagues raised the key interest rate by 0.50 percentage points to 3.0 percent.
Will the Fed still hold interest rate hikes?
At the same time, however, there are also increasing numbers of experts who do not expect the Fed to adjust its interest rate policy. “Is that enough to be considered the kind of breakthrough that would cause the Fed to do the switch? The market as a whole doesn’t see it that way,” LPL Financial chief strategist Quincy Krosby told CNBC. The expert assumes that the monetary watchdogs will at least discuss whether another rate hike is currently appropriate. “The question is, maybe they’re worried that it’s fueling fear,” she continued. “You should market [vor der Sitzung] say they will pause or continue fighting inflation. It’s all up for discussion.”
“Pausing” would cast doubt on the Fed’s resolve
Citigroup expert Andrew Hollenhorst also predicted that the Fed would refrain from “pausing”. “In our view, Fed officials are unlikely to pause on rate hikes at next week’s meeting,” the strategist said in a note to clients obtained by CNBC. “This would lead markets and the public to believe that the Fed’s determination to fight inflation lasts only until such time as there is turmoil in financial markets or the real economy.”
After Fed Chairman Jerome Powell initially dismissed the rising inflation rates as “temporary”, the central bank finally had to admit that it had delayed the turnaround in interest rates for too long. Therefore, according to Hollenhorst, the Fed should continue to work toward the 5.5 to 5.75 percent target range to bring inflation down to its 2 percent target.
Wall Street expects narrower rate hike
Krosby and Hollenhorst thus share the prevailing opinion on Wall Street. According to a survey by the CME Group, however, there has been a shift in expectations since the SVB debacle. While the majority expected an increase of 0.50 percentage points last week, 85 percent of traders now expect that a smaller interest rate hike of only 0.25 percentage points will be forthcoming.
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