Banking-sector developments have taken control of rate expectations ahead of the Fed's policy decision on Wednesday.
There hasn’t been a blackout period ahead of a Federal Reserve decision quite like this one before. Ordinarily, the more-than-one-week period — which limits the extent to which policy makers on the Federal Open Market Committee can speak to avoid any potentially market-moving comments — is a mostly quiet time for financial markets. This time around, banking-sector developments have upset expectations for interest rates more than one time ahead of the Fed’s policy decision on Wednesday.
That’s evident in the market’s pricing of the Fed’s most likely path forward . On March 8, before the collapse of California’s Silicon Valley Bank, expectations were moving toward an almost 6% terminal fed-funds rate — the level at which policy makers would be expected to end their rate hikes before cutting them again.
As of Monday, traders had settled into another line of thinking: the idea of a 4.91% terminal fed-funds rate — similar to where expectations were in January — and the possibility that it could stay above 3% for all of 2024. Then on Tuesday, they adjusted their expectations for the terminal rate once again, to include a decent chance of something at 5% or higher by May.
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