The Federal Reserve will release its much-anticipated decision today at 2pm ET.
There is a 77.5% chance that the Fed will raise interest rates by 0.25% – according to futures markets.
Hedge fund billionaire Bill Ackman says the Fed should pause – without raising rates at the March meeting. And Goldman’s top economist predicts a pause as well.
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Just two weeks ago it was expected that the Fed would raise rates by 0.5%.
That changed due to the failures of Silicon Valley Bank, Silvergate Bank, and Signature Bank. Plus, there was the $30 billion bailout of First Republic Bank (NYSE: FRC) and Swiss government’s attempt to save Credit Suisse (NYSE: CS) with an acquisition by UBS.
So, what will Jerome Powell do at today’s meeting?
Here’s how I’m thinking about the Fed’s potential options.
- 0.5% Rate Hike: If Powell raises by ½ point it shows that the Fed is completely out of touch with the turmoil and risks faced by regional banks. This would be extremely bad news for banks – and the stock market.
- 0.25% Rate Hike: A ¼ point increase is the widely anticipated decision. It shows that the Fed is responsive to the financial system risks – and continues to slow down the pace of interest rate increases. Stocks prices will likely move based upon Powell’s comments.
- Pause: If the Fed keeps rates at this level – it shows that they’re concerned about the financial system. By taking a break from rate increases it will provide more time to determine if there are more widespread financial risks to the system.
- Cut Interest Rates: A 0.25% or 0.5% interest rate cut would be a huge reversal. It would communicate deep concern of contagion of a regional bank crisis. It would also be a sign that the Fed is going to stop fighting inflation in order to save the banks.
I expect that Jerome Powell will raise rates by 0.25%. The market will likely respond with gains IF Powell indicates that the Fed is nearing the end of this rate hike cycle.
Right now, the market expects a ¼ point increase. With inflation at 6% – Powell feels pressure to continue raising interest rates. And since the market is anticipating and ready to digest another hike – he’s likely to follow through and deliver.
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My advice is that the Federal Reserve should pause its interest rate hikes at today’s meeting.
The reason is simple.
The financial markets just had a major shock with the failures of three U.S. banks. Shares of Credit Suisse are trading below $1. And First Republic Bank – the 14th largest U.S. bank – is down 86% year-to-date.
Regional banks across the U.S. are under pressure. Just look at the 21% drop for the SPDR Regional Bank ETF (NYSE: KRE) this year.
It remains unclear if the issues facing Silicon Valley, Signature, Silvergate, Credit Suisse and First Republic are unique to these banks.
There are many questions to be answered…
- Are there other banks facing similar issues? What yet unknown risks will come to light in the coming weeks?
- Will regional banks continue to see an outflow of deposits – as customers move funds to America’s biggest banks that are considered safer?
- The average checking account pays 0.6% in interest. With CDs and 2-year Treasuries yielding 4% – will banks need to increase the yield to retain deposits? How will this impact future profitability?
- Will regional banks restrict lending activities until they have greater visibility on their deposits and outflows? How will this impact the availability of credit to businesses and consumers? And what will be the downstream economic impact of more restrictive lending?
Banks are currently under financial stress – as a result of rates going from 0% to 4.5% in 1-year. And additional rate hikes will simply make things worse.
Pausing the rate hikes will provide the Fed more time to evaluate the current situation. Powell & Co. can always raise rates at the May or June meetings once they have more intel on this rapidly unfolding situation.
Stocks have rallied in the last 10 days on the expectation that rate hike cycle is coming to an end. Gone are the days of 0.75% interest rate increases at every single meeting.
Fed funds rates are likely to top out around 5%.
This will mark the top for interest rates during this cycle. And if the economy begins to crack – you can expect to see the Powell Pivot and rate cuts before the end of the year.
So, what’s the best way to profit from the coming Fed Pivot?
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