Zooming Out on the Recent Turbulence in the Banking Space
Today, we are catching up on the macro as we had an important moment to understand how the powers that be were feeling in the wake of the last few weeks turbulence in the banking space. Indeed, the world for this FOMC meeting looked very different from where things were last time. At least or especially to the casual observer. Now, consensus had been building for a shift back to a larger 50 basis point hike. In early March Powell attended annual congressional oversight hearings and delivered a Frank assessment of the macro situation. He said, quote, if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Jobs and CPI data for February had shown some cooling but were beginning to tell the story of sticky high inflation. Interpreting this as guidance that a reacceleration in rate hikes was in the cards, markets quickly adjusted. Pricing in a 78 percent chance that the fed would deliver a 50 basis point hike. Just days later, however, when the bank run at Silicon Valley was in full swing, the odds of a faster height collapsed entirely. Some market participants began to price in a chance that the fed would pause rate hikes with the probability peaking at 45% at the height of the panic. On Tuesday night of this week heading into the FOMC meeting, however, markets had priced a 73% chance of a 25 basis point hike, with the remaining probability assigned to a rate pause. Importantly, while this might sound like a strong consensus, that's actually the most uncertain market position in recent fed history. The fed almost always follows the market, but with a major economic shock occurring so close to a fed meeting, it was hard to know how the FOMC would weigh volatile market pricing. Jim Bianco actually outlined this in an excellent Twitter thread earlier in the week. He shared that the only example of the fed going against market consensus in the post 1994 forward guidance era was in September 2008. Bear Stearns had collapsed in March leading to large rate cuts, but by June policy had stabilized. That Lehman Brothers filed for bankruptcy, the day before the FOMC meeting, and markets scrambled to price in a 68% chance of a rate cut, where they had previously been signaling the expectation of no move. Fed chairman Ben Bernanke ignored this repricing of policy and health rates steady. Three weeks later, however, the FOMC would hold an emergency meeting to deliver a 50 basis point rate cut as markets rapidly deteriorated.