A dizzying uncertainty!

In March, one of the critical matters in the global economy is the bankruptcy of Silicon Valley Bank (SVB), which happens to be the sixteenth largest bank in the U.S. This issue goes beyond the failure of a single bank. The bankruptcy of SVB raises concerns about whether it may trigger a systemic crisis, which could lead to the collapse of the entire banking system due to its spillover effect. Against this backdrop, the Federal Reserve's March meeting saw an interest rate decision.

WHAT TRANSPIRED?

The U.S. Federal Reserve increased the policy rate by 25 basis points at its March meeting. Expectations before the SVB crisis started pointed to an increase of 50 basis points in weight. Because, in an assessment he made at that time, Powell stated that the policy rate should be set higher than previously anticipated, by looking at inflation developments. Thereupon, the market began to price a 50 basis point rate hike. However, after the SVB crisis broke out, comments were voiced that considering the possibility that the events would pose a threat to the entire financial system, it was necessary to skip this meeting and even to bring a discount to the agenda.

In summary, within a month, the policy rate decision expectation evolved from an increase of 25 basis points to an increase of 50 basis points, a pass or even a reduction, and finally an increase of 25 basis points. I think if there is a name for this process, it could be called "dizzying uncertainty".

IS 25 BASE POINTS ENOUGH?

Headline inflation is declining in the U.S. However, a significant part of this is due to the base effect, as monthly price developments do not reach the level desired by the Fed. The Core PCE, that is, the core personal consumption expenditures price index, which the Fed follows closely in its decisions, does not fall to the desired level.

The dot chart, where we saw the expectations of Fed members at the meeting, also shows that the expectations on the core PCE side were revised upwards. For example, the expectation of 3.5% for the end of 2023 was revised upwards to 3.6% at this meeting. When we look at it as it is, a 25 basis point interest rate increase seems insufficient to reach the 2% inflation target. However, it seems that the Fed has deemed appropriate a low rate hike in order not to turn the process that started with the SVB into a crisis and to give a message of determination in the fight against inflation.

WHAT DID POWELL SAY?

The thing that is as curious as the decision at the Fed meetings is President Powell's press conference. Because most of the time, Powell's verbal guidance can have more impact on the markets than the text of the decision. For example, we learned from Powell's statements, not from the text of the decision, that Fed members do not expect a rate cut for this year.

On the other hand, Powell's statements about the sinking SVB are also interesting. “We're still trying to figure out how SVB sank,” Powell said. We are currently trying to find out what went wrong with the SVB”. says. It seems that the Fed has almost the same level of knowledge as the market about the collapse of the SVB. Accordingly, it brings to mind the possibility that the risks related to the collapse of the SVB may be more than what we were told.