A trader works on the floor during morning trading at the New York Stock Exchange (NYSE) on March 10, 2023 in New York City.
Spencer Platt | Getty Images
Just yesterday, markets seemed confident that the tighter Federal Reserve would raise its benchmark interest rate by half a percentage point at its meeting in less than two weeks.
After all, it actually happened yesterday. Traders in the futures market were confident on Thursday that the Fed would keep its monetary policy stance tight and raise the quarter point rate it approved last month.
But one bank implosion and co-op jobs are announced later and the market has changed its mind.
The odds of a 0.25 percentage point hike rose above 70% at one point in morning trade, indicating that the Fed-induced panic has passed, according to CME Group.
“In general, the data is not against 50 [basis point] The Fed raised rates on March 22 despite strong wage advances,” Nationwide Chief Economist Kathy Bostiancic said.
Nonfarm payrolls rose 311,000 in February, well ahead of Wall Street’s estimate of 225,000, but down a notch from January’s 504,000.
Perhaps more importantly, average hourly earnings rose just 0.24% in the month, up 4.6% year over year, below estimates of 4.8%. It’s an important reading for the inflation-fighting Fed, which watched Friday’s Labor Department report closely as it tracks February consumer and producer prices next week.
“The Fed can take solace in rising labor supply and easing wage pressures to keep rates at 25 percent. [basis point] rate increase,” added Bostiancic. The basis point is 0.01 percentage point.
Bank of America and Goldman Sachs economists said Friday morning they stood by their forecasts for a quarter-point hike at the March 21-22 meeting of the Federal Open Market Committee. Both banks used the phrase “close call” in their forecasts, noting that the coming data week will play a big role in the Fed’s final decision.
“The February report was generally on the soft side,” Michael Gapen, chief U.S. economist at Bank of America, said in a client note. “While payrolls were higher than we expected, rising unemployment and relatively weak average hourly earnings data suggest a somewhat better balance between labor supply and demand.”
The 25-basis-point move marked a 50-basis-point move at one point on Thursday, with CME’s FedWatch measure of trade in federal funds futures contracts above 70%. It comes after Fed Chairman Jerome Powell told Congress this week that the central bank could raise rates sooner and higher than previously expected unless inflation data slows.
However, the price comes amid a sharp decline in the stock market and fears that the collapse of the Silicon Valley bank could be an indication of contagion in the financial sector. A move toward the quarter-point probability was more pronounced on Friday morning, although trading was volatile and the half-point move gained momentum.
“It was hard to separate the 50 basis point decline from SVB’s collapse,” said Liz Ann Saunders, chief investment strategist at Charles Schwab. “That should be on the Fed’s mind: Is this what’s going to break?”
