Turbulence prompts Wall Street banks to trim hawkish Fed bets

Nomura expects a 25 basis point rate cut at the end of the Fed’s two-day meeting on Wednesday.

Pershing Square’s Bill Ackman said the Fed shouldn’t raise its benchmark rate this week, arguing that the banking crisis had already had the effect of a “meaningful tightening of financial conditions”.

“We have had a number of major shocks to the system,” Ackman wrote in an extended Twitter post, citing three US bank closures, the pressure on First Republic Bank and the emergency takeover of Credit Suisse.

Elon Musk suggested the Fed drop the rate by at least 50 basis points on Wednesday, writing in response to Ackman’s post. Musk has previously called for the Fed to cut rates, arguing over the weekend that the US central bank was “operating with way too much latency in their data” given recent bank failures.

“We don’t yet know where the losses are for investors in these institutions and what the contagion effects may be,” Ackman wrote. With deposits becoming unstable, “what regional bank is going to commit meaningful capital to new construction or business loans in this context?”

Fed chairman Jerome Powell should make clear a pause is temporary and signal that “his intent is to resume raising rates at the next meeting unless the banking crisis remains unresolved,” Ackman wrote.

‘We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now.’

Jan Hatzius, Goldman Sachs

“This is not an environment into which the @federalreserve should be raising rates and adding additional pressure on the system as financial stability is the Fed’s first responsibility,” he said.

Terminal rate forecasts have also swiftly come down. While some banks still see it approaching 6 per cent, money markets now see it peaking at 4.8 per cent by May.

Meanwhile, the European Central Bank last week pressed ahead with a 50 basis point increase despite calls for a smaller cut or a pause in the face of stresses in the banking sector. Major investment banks now expect the ECB to deliver a 25 basis point rise in May.

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The Fed has raised rates by 450 basis points since last March in its fight against inflation.

But even with inflation having seemingly peaked it remains well above the Fed’s 2 per cent target. Consumer price inflation stood at a year-over-year annual rate of 6 per cent in February.

That, along with evidence of a still tight labor market forms the basis for expectations of a rate rise this week.

President Joe Biden maintained confidence in Federal Reserve Chair Jerome Powell, the White House said on Monday, amid criticism about the rate increases the Fed has approved in recent months and its handling of the banking crisis.

Democratic Senator Elizabeth Warren told NBC’s Meet the Press on Sunday that Powell had failed and should not be in his job.

Reuters, with Bloomberg