The Big Questions Around Inflation, Recession, Banking Contagion, And Fed Rates

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The growing view is that the banking crisis from Silicon Vally Bank (SIVB) and Credit Suisse (CS) is going to be a big deflationary force. Credit will be much scarcer from here on in and that should help the Fed bring down inflation across the world. Higher prices are going to be much tougher if credit is harder to come by. The current credit crunch typically precedes a recession. A US recession seems more likely today than it did 10 days ago.

Fed rates focus

When the Fed meet on Wednesday there is a growing expectation that they will either hike by 25bps or pause rates. The market will want to see whether the Fed will adjust their policy moving forward. Will they hint at the prospect of rate cuts this year? US interest rates are currently at 4.625%, but Short Term Interest Rate markets currently see the Fed cutting by 100bps by the end of the year. Is this projection going to be confirmed by the Fed on Wednesday or will they maintain higher rates to bring down inflation? What’s the message going to be? Some kind of recognition of the present conditions seems unavoidable, but expect big volatility on Wednesday over the meeting.

Banking contagion fears

The Fed balance sheet rose by nearly $300 billion last week as it took the largest jump higher since the Covid pandemic began. Financial institutions are grabbing short term loans from the Fed as liquidity fades and confidence fears grow

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It may be tempting to see the Fed cutting rates as the salve to heal the banking crisis wound. However, Gerard Macdonell, the senior manager at 22V Research LLC in New York point out that, ‘It is not at all clear that avoiding a rate hike would even help the financial troubles in the banking system’.


The prospect of a hard landing has just increased over the last 10 days. Major support for US stocks sits around the 3700 region. Note the 200 EMA on the Weekly chart as a crucial support level that will need to hold to keep bullish hoped alive for the S&P500.

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More By This Author:

Have The ECB Set The Tone For The Fed Next Week?
The Hard Decision Facing Central Banks
How Will The SVB & Credit Suisse Crisis Impact The ECB Rate Decision

Disclosure: High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs ...

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