The market has been reluctant to fully price in a hike from the Federal Reserve next week with odds hovering around 85%. Some of that may reflect uncertainty about First Republic Bank but it’s also a signal that the end of rate hikes is near. Even if the Fed does hike on May 3, the market isn’t expecting anything afterwards.
“The Fed needs to hike in May and go away,” writes CIBC today. “By standing pat for a couple of quarters, the FOMC will gain considerable insight into the drag from developments at regional banks. With growth slowing, inflation is unlikely to run away to the upside, but we’ll need time to let it ease off enough. So our call is for May’s move to be the final hike for this cycle.”
The estimate that the impacts of the banking strain are roughly equivalent to 50 bps but that’s much more art than science because each banking episode is unique and it’s too early to tell.
“All of this is complicated by the fact that we were overdue for a retrenchment from the bloated liquidity seen during the pandemic. The 4% year-on-year decline in the money supply is without precedent since the Great Depression, but in level terms, the money supply still looks ample relative to its prior trend line.”