Market Recalibrates After Powell Warns of Bigger Rate Hikes
After slowing its pace of rate hikes, the Federal Reserve may get back on the throttle in response to resilient economic activity.
Stocks and bonds whipsawed on Monday, despite regulators’ efforts to calm markets, as the second-biggest bank failure in US history added a new wrinkle in the outlook for monetary policy and demonstrated the potential for risks to emerge. Silicon Valley Bank disclosed last week that it sold bond holdings at a nearly $2 billion loss to fund redemptions, prompting a steep selloff in the company’s stock and a run on the bank. By Friday, the FDIC took control. The Federal Reserve and US Treasury Department stepped in two days later to guarantee uninsured deposits at two failed banks – SVB and Signature Bank – and create a new lending facility for other banks, aiming to prevent contagion. Shares in some regional banks fell sharply before trading was halted midday Monday, while the two-year Treasury yield was on track for its biggest three-day decline since 1987.
The regulatory fallout and market turmoil stemming from the SVB crisis could alter the course of the Fed’s rate path. Investors were bracing themselves for a bigger rate hike at the central bank’s meeting next week after Chair Jay Powell warned that hotter-than-expected inflation data could force policymakers to be more aggressive. Interest rate futures are now betting on another quarter-point rise, with a chance that the Fed pauses instead.
SVB’s sudden collapse illustrates the ever-changing nature of today’s markets and the possibility that cracks in the system can reveal themselves when financial conditions tighten. A rapid rise in interest rates has reverberated through the technology sector, whose shares have been under pressure since the Fed began its hiking cycle last year. This ripple effect engulfed Silicon Valley Bank, as tech investments cooled and startups – a key customer base for the bank – pulled their deposits.