SBNY - Goldman's Hatzius now sees Fed holding rates steady in March amid banking drama

2023-03-13 09:27:17 ET

Goldman Sachs strategist Jan Hatzius now expects the Federal Open Market Committee will not increase rates at its meeting next week, given the recent stress in the banking system, and sees "considerable uncertainty about the path beyond March."

That compared with the strategist's previous expectation for a 25-basis point hike at the March 21-22 meeting, that would have brought the federal funds rate target range to 4.75%-5.00%.

The odds of the Fed keeping its benchmark rate at 4.50%-4.75% are increasing, with traders now pricing in a 35.8% probability of no hike compared with a 0% chance on March 10. Still, the probability of a 25-bp increase stands at 64.2%, while that of a 50-bp hike now stands at 0% vs. 40.2% on Friday, according to the CME FedWatch tool .

U.S. banking regulators stepped in on Sunday to protect uninsured depositors in the Silicon Valley Bank ( SIVB ) and Signature Bank ( SBNY ) resolutions. The FDIC used the "systemic risk exception" in those two cases.

The move by the FDIC is likely to reduce the perceived risk of holding uninsured deposits in other institutions and is likely to be helpful in reducing deposit outflows, Hatzius said. "An open question is whether the FDIC would continue to address other institutions in the same manner and if they are smaller size than the two banks in question," he said.

The "systemic risk exception" allows the FDIC to waive the requirement that the resolution be the least costly option for the FDIC's Deposit Insurance Fund when broader financial stability is at risk.

The action taken by the FDIC and the Federal Reserve's creation of a funding program for banks both stop short of guarantees of ininsured accounts that were provided in 2008. To provide such broad guarantees would require congressional passage of a joint resolution of approval, Hatzius said. "He doesn't expect near-term actions in Congress to provide guarantees."

Looking ahead to the FOMC rate path, the Goldman strategists stick with their previous expectations for 25-bp hikes in May, June, and July, with a 5.25%-5.5% terminal rate, "though we see considerable uncertainty about the path."

On Sunday, the Fed created a special facility to offer loans of up to one year for eligible institutions that provide collateral such as Treasurys or mortgage-backed securities, to help ease liquidity pressures.

SA contributor Marc Chandler discussed on Monday morning how fears of a banking crisis spurred a sharp drop in U.S. rates, triggering lower European rates as well.

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