The bank panic may not be over. It all depends on the Fed

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One week ago, right in this here newsletter, I wrote about how Wall Street was having a Zen moment. It was Tuesday. Markets had chilled out, seemingly ready to move on from the turmoil of the previous week, which saw the collapse of three different banks and sparked fears of a rash of bank runs.?

But that bud of calm burst into chaos just a few hours later, naturally, when fresh turmoil at Credit Suisse opened a whole new can of worms for investors to freak out about.?

Fast-forward one week to today: It’s Tuesday again. Stocks are up from Hong Kong to London to New York. Credit Suisse is safe in the (awkward) embrace of its reluctant rescuer, UBS. Even First Republic (FRC), the bank deemed most likely to fall in the United States, saw its stock briefly surge more than 50% Tuesday after nosediving by the same amount the day before.?

Are we, like, actually out of the woods now? The answer, according to people much smarter than me, is a very confident maybe.?

One thing analysts seem to agree on is that what happens next hinges on the Fed, which will announce its latest policy decision Wednesday afternoon.?

Tomorrow’s Fed meeting may be the most important one of Jay Powell’s career. And it will be the first time the world hears from Fed officials since the collapse of Silicon Valley Bank, thanks to a cosmic twist of timing. (Fed staff are typically under a blackout period in the run-up to policy meetings. The previously scheduled blackout, in which they don’t speak to the press, began March 11 — exactly one day after SVB went belly-up.)?

In all likelihood, the Fed is going to raise interest rates by a quarter of a percentage point, or 25 basis points, underscoring its commitment to fighting inflation.

The Marriner S. Eccles Federal Reserve Board Building is seen on September 19, 2022 in Washington, DC.

Five questions for the Federal Reserve as the banking crisis drags on

But because of the banking turmoil, there is a chance the Fed would decide not to raise rates this time around. Goldman Sachs economists said this week that they expect Powell and Company to hold rates steady.?

That’s because the Fed’s aggressive rate hikes over the past year have eroded the value of bonds that make up a large portion of banks’ portfolios, and Wall Street folks are worried about those unrealized losses growing.?

If the Fed feels the crisis has passed, Alpert said, it will be emboldened to go for the quarter-point hike. If not, he expects the committee to say they are pausing.?

“They have an argument to pause that is pretty damn strong,” Alpert said in an email, noting that prices of food and housing are coming off recent highs.?

He added: “But what a tap dance Jay Powell is going to have to do at the press conference tomorrow” — covering the banking situation, rising layoffs, inflation and employment data, etc. “Hope he’s up to it!”

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