Investors, analysts and economists are uncertain of anything ahead of Wednesday’s Federal Reserve interest rate decision, with a string of bank failures prompting official action around the world and precipitating volatility in financial markets.
The S&P 500 Index was flat in morning trade. Equities in Europe and Asia mostly recorded small price gains.
The muted moves reflected widespread uncertainty about the outcome of the Fed meeting, with expectations turned on their head by the banking sector crisis.
“We still don’t know what’s going to happen,” said Max Gokhman, investment strategist at Franklin Templeton Investment Solutions. “There is a risk that there will be a much larger movement in the markets following the announcement.”
This uncertainty has been reflected in whipsaw trading for the past two weeks.
Just days before authorities took control of Silicon Valley Bank on March 10, Federal Reserve Chairman Jerome H. Powell told Congress he was ready to raise interest rates higher and faster in response on data showing inflation was stubbornly embedded in the economy.
Typically, the Fed likes to set investor expectations, guide them to the likely outcomes of interest rate decisions, and limit any potential market impact with a surprise move.
In early March, investors placed bets that the Fed would hike rates by half a point at Wednesday’s meeting, twice the rate the central bank hiked in February. They also predicted that a full percentage point of rate hikes would follow by mid-year.
Following the collapse of the Silicon Valley bank, which was attributed in part to the impact of higher interest rates on banks’ balance sheets, investors trimmed their bets on further rate hikes, leaning toward expectations of a quarter-point hike at Wednesday’s meeting, but exited the bank the door open for a bigger increase.
After another week of banking turmoil reverberating around the world, many began to believe that the Fed might leave rates on hold instead. “It’s a coin toss now,” said George Goncalves, the head of US macro strategy at MUFG Securities.
Mr Goncalves is tentatively predicting that the Fed will emphasize the need to keep fighting inflation but will stop raising rates due to the banking turmoil. Goldman Sachs economists have a similar forecast. Nomura economists boldly predict the Fed will cut interest rates to support the economy. Most traders are leaning towards a quarter point hike according to futures markets. “It’s a really challenging environment to hike,” Mr Goncalves said.
Derivatives markets, which offer bets on where the stock market is going, reflected this uncertainty ahead of Wednesday’s session.
Should the Fed decide to leave rates unchanged, market prices imply an expectation that the S&P 500 will rise between 1.5% and 2.5% by the end of the day, according to analysis by trading firm Optiver. If the Fed hikes rates by half a point, the S&P 500 could fall as much as 3 percent, the same derivatives prices show.
A quarter-point hike would put Mr. Powell on duty to brief investors on the Fed’s intentions when answering reporters’ questions at what is expected to be a pivotal news conference, said Tom Borgen-Davis, Optiver’s head of equity research.
“It’s the first time in a long time that the outcome is so uncertain,” he said.
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