Fed Implications Of SVB Crisis - Reconsidering 50 (3/3)

Even if Powell exudes calm on the financial stability front, the more dovish and centrist FOMC participants will be mindful going into the meeting that the hiking cycle has gone on for exactly a year, about enough time for the lagged effects of tightening to start to be seen.

• The point of slowing to 25bp hikes in Feb was to provide more scope to reassess the landscape and see how policy is working with a lag - and the SVB episode is a consequential and cautionary example of how higher rates feed through to the banking system, by way of reaching the real economy.
• March's rate decision is still about the data. But barring big upside surprises in payrolls and CPI in the next few days, the SVB episode and subsequent market reaction will probably bring more support into the 25bp column, and could spur more discussion about criteria to pause at an upcoming meeting.
• (Powell had promised more on the pause criteria discussion in the Feb meeting minutes, but those details appears to have been scrapped from the record after the strong Jan payrolls among other data).
• Certainly, the timing of the SVB episode means FOMC participants' minds will be refocusing on the risks of over- vs under-tightening. Reverting to a 50bp hike on the basis of developments since the last meeting appears more of a gamble than it did a few days ago. They can always guide higher on the terminal rate in the Dots.
• Blackout guidelines mean FOMC participants can't express their views on macro developments/monetary policy issues. But that doesn't necessarily preclude the Fed itself saying something on banking sector stability if the situation appears to be worsening.
• That would fall short of telling us whether the FOMC currently favors 25 or 50 this month. But Powell has over the course of this cycle steered markets very explicitly toward one outcome or another pre-decision, even "leaking" the June 75bp decision via the Wall Street Journal. Mere speculation, but that precedent means that scenario could repeat later next week after the jobs and CPI numbers are digested and Powell reaches consensus.