The U.S. central bank delivers its interest rate verdict with inflation well above target but declining, the labor market its strongest in years but creaking, the most volatile U.S. fixed income markets in decades and lending set to slow thanks to a banking crisis that erupted barely two weeks ago.
Rates traders are putting an 80% probability on a 25 bps rate increase and 20% on a pause. There are still calls for the Fed to make a clear distinction between price and financial stability, and go ahead with an inflation-busting 50 bps hike.
The Fed’s decision and latest economic projections come days after coordinated action from U.S. authorities to ring-fence domestic banks, a renewed push for broad-based reform of the banking system and coordinated global action to maintain the global flow of dollars.
The fog of uncertainty is understandably thick.
What seems clearer is that markets are on a more positive footing than they were only a few days ago, before the UBS-Credit Suisse shotgun marriage, united central bank front on FX dollar swap lines and Treasury Secretary Janet Yellen’s latest remarks on strengthening banks and protecting depositors.
U.S., European and Asian stocks all rallied strongly on Tuesday, commodities rose and bonds fell – shares in First Republic Bank rose a record 30%, GameStop surged 32% and the two-year Treasury yield had its biggest rise since 2009.
