Fed Repriced Out of ActionMarch 13, 2023
We just experienced the fastest bank run in history with the closure of Silicon Valley Bank. Apparently over 40% of the company’s deposits fled last Thursday and early Friday before closure. To put this is context, when Continental Illinois—at the time, the largest ever bank failure—went bankrupt in 1984, 25% of deposits fled in the week prior to closure.
How have the actions of the last few days impacted expectations for further interest rate increases from the Fed? Well, the short answer is that the failure of SIVB has prompted the market to price in the expectation that the Fed is done raising rates.
First, look at the world a week ago. Using Bloomberg’s WIRP feature, we can see that a week ago the market was pricing the Fed’s peak rate at 5.476 at the September meeting.
Fast forward to today, and peak rate expectations have tumbled to 4.76 at the May meeting. Given that the upper bound in fed funds is currently 4.75%, this suggests the market is pricing in a completed tightening cycle.
Looked at differently over the last 10 days, we can see how fast the market has repriced the Fed’s path. In the last two trading sessions, the market has basically called the end to this tightening cycle, with futures dropping to the current upper bound.
Does the CPI report alter this repricing? We’ll see tomorrow.
As of 12/31/22, SVB Financial Group was not held in the Knowledge Leaders Strategy.