The debacle with the federal government’s intervention in Silicon Valley Bank’s failure makes it increasingly likely that the Federal Reserve will hold off on raising interest rates next week.
The Federal Deposit Insurance Corporation announced on Friday that Silicon Valley Bank, known as SVB, had failed and been taken into government hands. The move caused some to speculate about a bank run, with regulators also closing major crypto lender Signature Bank on Sunday. Officials provided reassurances over the weekend that the banking system was sound.
Just days ago, a big contingent of investors was betting that the Federal Reserve would increase its scale of rate hikes and conduct a half-percentage point revision in response to rising inflation. But with the fallout from the collapses of SVB and Signature, many now think the Fed won’t act at all next week and will keep rates at their current level to avoid further stress to the banking system.
Before SVB’s collapse, about a week ago, investors were pegging the odds of a 0.5 percentage point hike at the Fed's meeting this month at about 31%, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. They put the odds of a milder 0.25 percentage point increase at about 68%.
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By Monday morning and after a weekend of turmoil and speculation, those odds were totally transformed. The odds of no hike were approaching 50%, with the other half betting on a 0.25 percentage point hike.
But things are moving fast as investors process a flurry of data and analysis coming from all directions.
President Joe Biden addressed the situation from the Roosevelt Room of the White House on Monday morning. He assured SVB and Signature Bank depositors their money is protected and sought to assuage fears about a broader contagion spreading through the banking system and creating chaos.
“Your deposits will be there when you need them,” Biden said, adding that no losses will be borne by taxpayers.
Biden also made a point of highlighting that SVB and Signature investors will not be protected from the collapse. He noted that those investors took a risk and will have to deal with the consequences of their investments.
Biden’s speech moved markets quickly. After the brief remarks, the odds of no Fed action next week dipped to below 20%, while more than 81% were betting on a 0.25 percentage point increase. The CME odds are likely to change rapidly as investors digest the situation and how far its fallout might reach.
Goldman Sachs also hopped on the zero-increase bandwagon on Sunday. Lead economists there forecast no rate revision following the collapse of SVB and Signature.
“In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,” said Goldman economist Jan Hatzius in a Sunday note.
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Stock futures for other banks were feeling the heat on Monday morning after markets opened, raising fears of a spreading contagion in the banking system. Shares of San Francisco-based First Republic Bank plummeted by 65% after open. Western Alliance Bancorp was off 61%, while PacWest Bancorp and Zions Bankcoproration were down by more than 20%.
Investors also fled to Treasuries given the bank collapses, with the 10-year Treasury yield falling more than 0.20% to 3.48% on Monday morning. Meanwhile, gold prices surged as investors eyed safe-haven assets. The price of gold is above $1,900.