As the financial markets sort through the banking sector's issues, speculators have adjusted their outlook for interest rates for 2023 and beyond.
In the first table, you can see that on March 3, speculators were expecting the Federal Reserve to raise short-term interest rates to between 5.25% and 5.5% by June. But that changed after regulators took over Silicon Valley Bank and Signature Bank.
At this point, speculators are now anticipating the Fed will drop interest rates to between 3.5% and 3.75% by late this year. The lower rates would bring some welcomed relief to the banking sector, which has faced some challenges due to the Fed’s rapid increase in short-term interest rates in 2022.
An old expression says the Federal Reserve raises interest rates until something breaks. Something broke. And as the banking issues linger, it's unclear whether fighting inflation or improving financial stability is the top priority for Fed Chair Jerome Powell.
The Fed will let us know the answer when it concludes its two-day meeting on March 22. At that point, I’ll work with my team to assess the Fed’s position and let you know if I’m changing any part of my outlook.