The Fed Could Halt Hikes or Cut Rates Amid Banking Crisis: Analysts

• Nomura economists expect the Fed to cut interest rates by 0.25 percentage points next week.
• They think the Fed could pivot from its aggressive rate hikes due to “looming financial stability risks.”
• The US banking sector continues to be rattled by the collapse of two banks over the last few days.

Some high-profile experts are starting to expect the US Federal Reserve could not only halt its aggressive rate hikes amid the banking crisis — but also cut rates altogether. 

Economists at Nomura expect the Fed to reverse its aggressive tightening policy and cut the benchmark interest rate by 25 basis points at its meeting next week amid the US banking crisis, according to a Monday note seen by Insider.

Nomura’s prediction came as the US banking sector continues to be rattled by the collapse of Silicon Valley Bank and Signature Bank, New York over the last few days after a run on deposits which spurred fears of a contagion in the broader financial crisis.

Nomura economists were previously expecting the Fed to hike rates by 0.5 percentage points at its two-day meeting on March 21 and 22, but are now expecting a rate cut due to “looming financial stability risks,” economists Aichi Amemiya and Jacob Meyer wrote in the report. 

US authorities moved swiftly to contain the fallout from the recent bank collapses by guaranteeing all deposits at Silicon Valley Bank and Signature Bank, New York. The Fed also announced the new Bank Term Funding Program on Sunday, which offers one-year loans to banks that pledge collateral.

But US bank stocks are still getting hammered.

“Judging by the market’s reaction, financial markets seem to view these policy actions as insufficient, as stock prices for the US financial sector continue to decline as of this writing,” the economists wrote. “One market concern is that a deposit flight might not slow anytime soon” due to various reasons, including concerns from corporate customers that they may not have access to their deposits — even temporarily.

Even though a 0.25 percentage point rate cut is unlikely to be a “panacea” for banks, markets could quickly price in further rate cuts if the Fed signals lower rates in the future, the Nomura analysts wrote.

“This could somewhat reduce the risk of further bank runs, as well as reduce unrealized capital losses,” they added. That’s because bond prices and yields have an inverse relation, so when interest rates drop, prices bond prices tend to go up, which could alleviate losses. 

The Fed hiked interest rates eight times over the past year to its targeted levels of 4.5% to 4.75% now. 

A growing chorus of experts tout a relaxation of the Fed’s rate-hike cycle

Nomura joins a growing chorus of experts who think the Fed could be forced to step back from its aggressive rate hikes.

On Sunday, investment banking giant Goldman Sachs said it doesn’t expect the Fed to hike interest rates at its next meeting. The investment banking giant was previously expecting the US central bank to hike the rate by 0.25 percentage points.

Top economist Mohamed El-Erian tweeted on Monday that the Fed could be compelled to halt its rate hikes aimed at cooling inflation.