Wednesday’s rate decision was highly anticipated…

And completely uneventful.

The Federal Reserve offered nothing new that the market didn’t already know.

There was the 25-basis-point rate hike, which brought the fed funds rate up to 5.053%.

May fed fund swaps that expired after the announcement had the implied rate at that level since November.

The only real uncertainty from the market regarding Wednesday’s unanimously supported rate hike from the Fed took place in the few days after the Silicon Valley Bank collapse in early March… then quickly went right back to pricing in a fed funds rate above 5%, as you can see from the chart below…

Then there was the path of future rate hikes… with Fed Chairman Jerome Powell officially opening the door for a pause by saying the committee is pivoting to making decisions on a meeting-by-meeting basis…

That too was already known by all… as you can see from the chart below, which shows the market already pricing in a pause for the upcoming June meeting and eventual rate cuts in the second half of the year…

This chart was a snapshot of the implied rate for every Federal Open Market Committee (FOMC) meeting until January 2024. It’s from May 2… one day before the FOMC rate decision.

As usual, the market knows what the Fed will do before it does it.

On the surface, the potential for a dovish Fed pivot should have sent stock prices to new year-to-date highs… Except they fell, leading me to believe that the Fed pivot that’s now obvious to all has already been priced in.

Today… As the banking crisis grows, that implied rate curve now looks like this…

It’s showing not just a pause, but a U-turn…

With five rate cuts priced in by January, which would bring the fed funds rate down by 125 basis points to 3.8%.

Alex Gurevich, CIO of HonTe, said it as eloquently as I’ve heard back in 2018…

We’re probably seeing this play out now as well…

Because what the market hasn’t priced in is how it fell hard for the very false narrative that Silicon Valley Bank and Signature Bank were just isolated incidents… bank failures that occurred as a result of excess risk taking and a duration mismatch on their balance sheets, not a systemic problem.

Then came Credit Suisse… The market didn’t care.

Then came First Republic Bank… The market was mesmerized by Microsoft’s and Meta’s earnings.

Now comes Western Alliance, PacWest, and First Horizon…

Regional banking problems are mushrooming.

And if this does turn out to be like the “last kiss”… with the Fed cutting rates earlier than Jerome Powell was thinking about… It won’t be for reasons the market will like.

Twelve-month Treasury bills are still trading at 4.37%… So you’d better grab yield while you can.

Regards,

Eric Shamilov
Analyst, Trading With Larry Benedict