WASHINGTON, March 16 ― With just six days to go before Federal Reserve policymakers sit down in Washington, exactly what decision they'll make on interest rates now and in coming months has become pretty much anyone's guess, and investors and Wall Street economists are doing just that.
In one of the most vivid ― and relevant ― examples, on Monday the yield on the 2-year Treasury note, among the top traded securities in the world that also stands as a proxy for Fed policy expectations, plummeted by more than half a percentage point, the most since the day after Black Monday in October 1987. It then recovered roughly half that on Tuesday only to drop by another third of a point on Wednesday.
Traders now see next week as a tossup between a smaller quarter-point hike and a pause, with rate cuts seen likely in following months as the turbulence at Credit Suisse renewed fears of a banking crisis that could cripple the US economy. A pause, he argued, risks undoing the work of the Fed's 4.5 percentage points of rate hikes since last March.
After the bank failures in recent days, “We’re getting a better sense of who’s suffered due to the Fed’s aggressive tightening,” JPMorgan's Michael Feroli wrote. Slower growth in lending by mid-size banks will sheer off a half to a percentage point of economic growth overall, he predicted, “broadly consistent” with the view that higher interest rates will trigger a US recession that will in turn slow inflation.