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By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

Thursday, March 23, 2023

Even with a nod to greater banking stress, the major central banks all seem determined to tighten the monetary screw another notch.

After the Federal Reserve settled on another quarter point rate rise late Wednesday, the Swiss National Bank – in the eye of its own domestic banking storm – followed suit on Thursday with a half-point hike to 1.5%. Norway’s central bank raised rates by 25 bps.

And after a disturbing return to double digit inflation in the UK last month, the Bank of England is now almost certain to lift rates by another quarter point to 4.25% later on Thursday.

If these monetary policymakers felt higher interest rates were the main cause of this month’s banking shock, or that the fallout from it was truly systemic and economically damaging, the decision to push ahead with the hikes would seem perverse.

 That they have pushed ahead suggests some confidence perhaps that the financial firestorm is contained, unlike inflation. Whether that’s down to over focus on the rear-view mirror remains to be seen and what may be coming down the pike best explains how markets are trying to react to the latest policy twists.

Even though the Fed indicated one more rate rise may still be in the works and no rate cuts are likely this year, markets are doubting that stance yet again.

An eagle tops the U.S. Federal Reserve building’s facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

With Treasury Secretary Janet Yellen’s pushback against suggestions of a blanket insurance of all U.S. banking deposits unnerving investors again after the Fed decision, few believe the financial stress has fully dissipated. And no one is certain yet how it will hit lending and the wider economy.

So markets have read the Fed move as a “dovish hike”, preferring to focus on aspects of the decision, such as the removal of wording in the statement on “ongoing” rate hikes.

 “Our view is that the Fed is at or near the end of the hiking cycle,” PIMCO economists Tiffany Wilding and Allison Boxer told clients on Thursday, stressing that small U.S. regional banks are key in providing credit for small businesses that account for about 50% of overall U.S. employment.

 After wild swings in rate futures markets and short-term Treasury yields over the past month, the former now sees a 50% chance of another quarter point Fed hike in May – but, facing down Fed guidance, also more than half a point of cuts by year end.

Two-year Treasury yields settled just under 4% early on Thursday – almost a full point below the new Fed funds rate target – and equity and bond market volatility gauges have ebbed somewhat.

Even though stock markets swooned after the Yellen comments on Wednesday, S&P500 futures were back up smartly ahead of Thursday’s open. European bourses and banking stocks were only a touch lower in the face of the latest European rate rises.

The dollar hit its lowest since early February but regained its footing ahead of the U.S. open and BoE decision.