By: Gerald Sparrow President & Founder, Sparrow Capital Management, Inc.
For the Federal Reserve, credibility is everything. And its credibility is being tested by how it plans to manage the banking system in the days leading up to its March 21-22 meeting.
Last month, Fed Chair Powell confidently told Wall Street to prepare for a 25-basis point increase in short-term rates in March. But with inflation remaining hot, some speculators have been calling for a 50-basis point bump.
To complicate matters further, 2022’s rapid rise in interest rates appears to be a stressor on the banking system. The Federal Deposit Insurance Corporation (FDIC), in recent days, took control of both Silicon Valley Bank (SVB) and Signature Bank (SB). And now some are suggesting that the Fed should pause its strategy to manage inflation with higher interest rates to help the banking system.
In short, the Fed is at a bit of a credibility crossroads. Supervising and regulating the banking system as a means of protecting consumers is one of the Fed’s most important roles. That’s why the U.S. government has already approved plans to safeguard depositors and financial institutions affected by the closing of both SVB and SB.
At the same time, Wall Street wants to believe the Fed is data-dependent, not data-reactive. The markets want to believe the Fed has a plan for inflation and is considering how higher short-term interest rates are affecting the nation’s banks.
So, in my opinion, it’s best to prepare for more market volatility in the days leading up to the Fed’s two-day meeting. Wall Street is sorting through several issues, and it’s looking to the Fed to provide some reassuring guidance.
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is not intended to be individual or personalized investment or tax advice and should not be used for trading purposes. Please consult a financial advisor or tax professional for more information regarding your investment and/or tax situation.
