Will US Fed hike interest rate by 25 bps on March 22? Jefferies, Nomura answer

With the US Federal Reserve policy review scheduled for March 21-22, all eyes are on whether the hawkish central bank goes for a 50 basis points (bps) rate hike or a smaller one, following the Silicon Valley Bank saga.

Probably the best clue to what the Fed does at the next meeting on March 25 is how markets behave in the interim, given the Fed’s obsession with financial conditions, said Jefferies in its latest GREED & fear report.

"In this respect, the more calm is restored following the panic selling of bank stocks in recent days, the more likely the Fed is to announce another 25 bps hike, whereas if risk-off continues a pause seems much more likely," the foreign brokerage said.

The US Fed Chair Powell in his recent testimony reiterated that the FOMC would continue with a restrictive monetary policy and would be data driven. FOMC would be open to increasing the pace of rate hike, taking the terminal rate higher than previously anticipated, Powel said.

Data showed core CPI in the US accelerated slightly to 0.5 per cent month on month in February from 0.412 per cent in January. On an unrounded basis, the upside surprise in MoM core CPI inflation was relatively small.

Nomura said the March FOMC meeting largely hinges on financial stability risks as opposed to macroeconomic situations, even as the underlying inflation trend remained strong.

"We think the bar for the Fed to raise rates by 50 bps (instead of 25 bps) in March has become higher in light of the recent banking sector liquidity issues (market implied expectations have come off meaningfully. We think that we need to see a large inflation upside surprise to justify a 50 bps hike from the Fed. Nomura's economists are looking for 0.4 per cent MoM but in line with consensus – which, if it materialises – we think, will not justify a 50 bps hike," it said.

JM Financial believes that the FOMC would continue with a 25 bps hike. There is no compulsion on RBI to hike at this juncture, it said.

Analysts noted that while used vehicle prices continued to decline in US, non-auto goods prices rose steadily. Rent and owners’ equivalent rent (OER) remained elevated and non-rent/OER core service inflation accelerated to 0.50 per cent MoM  from 0.36 per cent MoM, partly supported by strong increases in airline fares.  

"One silver lining for the Fed is that rent inflation for large cities, continued to gradually decelerate," Nomura said.

SVB collapse

Jefferies said its base case suggest that SVB is not a systemic risk for banks because it is an unusual bank.

"Still in a world where US banks were already facing the risk of an outflow of deposits to higher yielding government guaranteed money market funds, that risk will have increased further. Bank deposits have already declined $520 billion or 2.9 per cent since peaking in mid-April 2022. By contrast, assets in MMFs have risen by $425 billion or 9.5 per cent since late April 2022," it said.

Jefferies said Federal Deposit Insurance Corporation's decision to extend the guarantee of deposits to all depositors in SVB to the full amount was extraordinary but not surprising.

"This move has been designed to ease concerns, triggered by SVB, about the value of “assets held to maturity” on banks’ balance sheets, which account for an average 42 per cent of US large-cap banks’ total securities holdings and 34 per cent of mid-cap banks’," it said.

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