The March Federal Open Market Committee (FOMC) regular meeting, which determines the U.S. benchmark interest rate, began on the 21st (local time) for a two-day schedule, amid repeated warnings from Wall Street heavyweights that rates should not be raised. This is due to concerns that additional rate hikes could backfire amid a systemic crisis triggered by the collapse of Silicon Valley Bank (SVB). However, the market is leaning toward a baby step (a 0.25 percentage point increase in the benchmark interest rate).
According to economic media CNBC and others, Bill Ackman, CEO of Pershing Square Holdings and a hedge fund heavyweight, argued through a lengthy tweet the previous night that "the Fed should hold rates steady."
CEO Ackman mentioned the recent closures of SVB and Signature Bank, the liquidation of Silvergate Bank, the crisis rumors surrounding First Republic Bank, and UBS's acquisition of Credit Suisse (CS), stating, "The system is experiencing multiple major shocks." He pointed out, "Investors do not even know exactly where losses have occurred or what contagion effects might arise." He also argued that these events have already had a tightening effect on financial conditions.
CEO Ackman emphasized, "This is not an environment for the Fed to raise rates and put pressure on the system. (Financial) stability is the Fed's primary responsibility." However, he agreed that the tightening stance should continue given that inflation remains high. He said that Fed Chair Jerome Powell should make it clear that the 'pause is temporary' and signal a resumption of rate hikes later. This aligns with the diagnosis of Lloyd Blankfein, former CEO of Goldman Sachs, who previously supported a rate pause, noting that the recent banking crisis has had a tightening effect similar to rate hikes in some respects.
Elon Musk, CEO of Tesla, also added his opinion via tweet opposing rate hikes in response to Ackman's rate pause tweet. Musk went further, arguing that "the Fed needs to cut rates by at least 0.5 percentage points." He had previously called for Fed rate cuts. However, experts generally agree that the Fed is very unlikely to cut rates immediately. Among global investment banks, only Nomura currently expects the Fed to cut rates in March.
On the eve of the rate decision, the market widely expects the Fed to take a baby step. According to the CME FedWatch tool as of the morning of the day, the federal funds futures market reflects more than an 85% chance that the Fed will raise rates by 0.25 percentage points at the March FOMC, up from the 73% range the previous day.
This is interpreted as a result of eased market concerns following UBS's acquisition of Credit Suisse (CS), additional support considerations led by major U.S. banks including JP Morgan, and Treasury Secretary Janet Yellen's statement that "the government will guarantee more deposits if necessary to prevent contagion in the banking sector" earlier that morning.
Jim Reid, strategist at Deutsche Bank, said, "As market sentiment turns positive, investors expect the Fed to raise rates tomorrow," forecasting a 0.25 percentage point hike. Brandon Murphy of Inside Investments evaluated, "If the Fed does not raise rates by 0.25 percentage points, some will question the Fed's resolve to lower inflation, which could lead to an entirely new problem."
The outlook for a rate pause, which surged immediately after the SVB incident, dropped to 14.4%. The possibility of a big step (a 0.5 percentage point increase in the benchmark rate) is 0%. The big step card, which was prominent earlier this month, has been taken off the table following the SVB incident.
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