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SVB collapse upends expectations for Federal Reserve rate decision


Goldman Sachs economists no longer expect a rate movement at all. While Goldman analysts still believe the Fed will raise rates above 5.25%, they wrote Sunday night that they “see considerable uncertainty on the path.”

This moment poses a major challenge for the Fed: it is tasked with fostering stable inflation, which is why it has raised interest rates to slow spending and business expansion, hoping to dampen growth. and moderate price increases. But it is also responsible for maintaining the stability of the financial system.

Because higher interest rates can expose weaknesses in the financial system — as illustrated by the Silicon Valley Bank explosion on Friday and the huge risks facing the rest of the banking industry — these goals can conflict. .

Subadra Rajappa, head of US rates strategy at Societe Generale, said on Sunday afternoon that she believed the changing banking situation would serve as a warning against a rapid and drastic change in rates – and she said that the instability of the banking sector would make the work of the central bank “more delicate”. “, obliging him to reconcile the two jobs.

“On the one hand, they’re going to have to raise the tariffs: that’s the only tool they have,” she said. On the other hand, “it will expose the fragility of the system”.

Mrs. Rajappa compared it to the old adage on the beach at low tide: “You’ll see, when the tide goes out, who swam naked.

Some have seen the Fed’s new lending program — which will allow banks hurting in the high rate environment to temporarily shift some of the risk they face from higher interest rates to the Fed — as a sort of insurance policy that could allow the central bank to continue to raise its rates without causing further breaks.

“The Fed has basically just taken out interest rate risk insurance for the entire banking system,” said Steven Kelly, senior research associate in Yale’s Financial Stability Program. “They basically guaranteed the banking system, which gives them more leeway to tighten monetary policy.”

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