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- Odds that the Federal Reserve will hold its benchmark rate steady at its March meeting have jumped.
- Investors were pricing in 44% odds the Fed will hold off on hiking rates at its March 21-22 meeting.
- "The world changed on Friday with the bank failure of Silicon Valley Bank," said a Jefferies FX strategist.
The failure of Silicon Valley Bank has lit up odds that the Federal Reserve will hold off on raising interest rates at its meeting this month, a decision that would break a year-long string of aggressive hikes as investors recalibrate after the biggest bank failure since 2008.
Investors on Monday were pricing in a 44.6% probability the Fed will hold the fed funds rate at the 4.5%-4.75% range, according to the CME FedWatch tool. That's up from zero odds over the past month that Fed would hold off on raising its benchmark rate again.
The probability that the Fed will stick with its hiking pace of 25 basis points was at 55.4%.
The Federal Open Market Committee in February downshifted its rate increase to 25 basis points in delivering its eighth straight rate increase since March 2022 as policymakers considered that inflation had come off its peak levels.
US Treasury bond yields on Monday continued their steepest plunge since the global financial crisis, partially reflecting anticipation the Fed may hold rates steady at its March 21-22 meeting. The 2-year Treasury yield, which is sensitive to Fed-rate expectations, sank 49 basis points to 4.089%.
Just last week, that yield surged to more than 5% for the first time since 2007. Markets, taking in congressional testimony from Fed Chairman Jerome Powell, had reflected expectations the Fed could push up rates by 50 basis points as inflation remains too high for the central bank's 2% goal.
"The world changed on Friday with the bank failure of Silicon Valley Bank which is a case in bank mismanagement, for sure, but also a symptom of aggressive rate hikes," Brad Bechtel, global head of FX at Jefferies, said in a Monday note.
"I do think the move in the US yield curve is well overdone, but it does seem to be the case that a 50bps at the next meeting is all but impossible with many thinking [the FOMC will] now cut sooner rather than later," he wrote. "If they really do feel they have 'solved' this bank run issue and that the dust settles on this then it will actually potentially embolden Powell to keep going on rate hikes."
Goldman Sachs now expects the Fed to take a break in raising rates at its March meeting.
"In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March," Goldman Sachs analysts wrote in a Sunday note seen by Insider.