More Rate Hikes Ahead Amid Banking Uncertainty

The Federal Reserve will deliver its interest rate decision on Wednesday, and American banks will be paying particularly close attention as the reverberations produced by Silicon Valley Bank (SVB) continue to have a significant impact on the financial markets.

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According to the CME Group, a majority of futures traders predict that the Federal Reserve will announce a 25 basis point increase in its benchmark lending rate range between 4.75 percent and 5.00 percent, beginning in December.

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The Fed's latest rate hike would follow its previous increase in February. It would mark the ninth increase since the Fed began tightening monetary conditions last year in an attempt to combat rising inflation, which resulted in the US central bank's recent hike in interest rates.

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Despite the efforts of the Fed to keep inflation at two percent over the long run, price rises continue to remain well above the two percent target set by the central bank.

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The collapse of Swiss bank SVB was the catalyst for a global squeeze on banking stocks, following which two other American banks were close to failure, and Swiss investment bank Credit Suisse was merged with regional rival UBS as a result of the global squeeze.

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There is a growing consensus that the Fed will continue with a more modest hiking cycle than was predicted a few months ago due to the combination of the hot economic data at the start of the year and the uncertainty in the banking sector.

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Stephen Juneau, a senior US economist at Bank of America Global Research, told AFP that despite the recent news and developments in the markets, "we now perceive that there is a kind of risk facing both sides."

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The Fed is still looking to hike rates by 25 basis points in March, May, and June," said Mr. Kashkari.

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According to Janet Yellen, the Secretary of the Treasury, the banking sector of the United States has been stabilizing as the recent failures of SVB and Signature Bank indicated.

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There is a possibility, however, that similar measures may also be warranted if smaller institutions suffer deposit runs that have the potential to lead to an epidemic.

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In the wake of Yellen's comments, American stocks have been gaining modestly since Monday, which reflected a more positive start to the week.

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It appears that some of the fear of further contagion dissipated as the VIX, Wall Street's favorite volatility gauge, dropped its biggest two-day decline since May.

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While continuing to battle inflation, Fed Chair Jerome Powell will have a challenge on Wednesday.

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Oxford Economics' chief US economist Ryan Sweet wrote in a note to clients that the Fed must emphasize its dual mandate of full employment and stable prices.

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As the US central bank prepares to announce its decision, Juneau from Bank of America expects it to become "a bit more dovish" in its language.

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Wednesday will also bring an update on the Fed's GDP growth and interest rate projections.