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The Federal Reserve’s hotly anticipated March 22 interest rate decision is just a week and a half away, and the drama that swept the banking and financial sector over the weekend is drastically shaking up expectations for what the central bank will deliver.
Before this weekend, investors believed there was a substantial chance that the Fed would make a half-point increase at its meeting next week. But investors and economists no longer see that as a likely possibility.
Three notable banks have failed in the past week alone as Fed interest rate increases ricochet through the technology sector and cryptocurrency markets and upend even usually staid bank business models. The tumult — and the risks that it exposed — could make the central bank more cautious as it pushes forward.
Investors have abruptly downgraded how many interest rate moves they expect this year. After Mr. Powell’s speech last week opened the door to a large rate change at the next meeting, investors had sharply marked up their 2023 forecasts, even penciling in a tiny chance that rates would rise above 6 percent this year. But after the wild weekend in finance, they see just a small move this month and expect the Fed to cut rates to just above 4.25 percent by the end of the year.
Economists at J.P. Morgan said the situation bolstered the case for a smaller, quarter-point move this month. Goldman Sachs economists no longer expect a rate move at all.
Other economists went even further: Nomura, saying it was unclear whether the government’s relief program was enough to stop problems in the banking sector, is now calling for a quarter-point rate cut at the coming meeting.
The Fed will receive fresh information on inflation on Tuesday, when the Consumer Price Index is released. That measure is likely to have climbed 6 percent over the year through February, economists in a Bloomberg forecast expected. That would be down slightly from 6.4 percent in a previous reading.
But economists expected prices to climb 0.4 percent from January after food and fuel prices, which jump around a lot, are stripped out. That pace would be quick enough to suggest that inflation pressures were still unusually stubborn — which would typically argue for a forceful Fed response.
The data could underline why this moment poses a major challenge for the Fed. The central bank is in charge of fostering stable inflation, which is why it has been raising interest rates to slow spending and business expansions, hoping to rein in growth and cool price increases.
But it is also charged with maintaining financial system stability, and higher interest rates can reveal weaknesses in the financial system — as the blowup of Silicon Valley Bank on Friday and the towering risks for the rest of the banking sector illustrated. That means those goals can come into conflict.
Some saw the Fed’s new lending program — which will allow banks that are suffering in the high-rate environment to temporarily move to the Fed a chunk of the risk they are facing from higher interest rates — as a sort of insurance policy that could allow the central bank to continue raising rates without causing further ruptures.
“The Fed has basically just written insurance on interest-rate risk for the whole banking system,” said Steven Kelly, senior research associate at Yale’s program on financial stability. “They’ve basically underwritten the banking system, and that gives them more room to tighten monetary policy.”

The Justice Department has launched a inquiry into the sudden collapse of Silicon Valley Bank, according to a person with direct knowledge of the investigation.
Federal prosecutors are starting to ramp up a probe into the doomed Silicon Valley Bank just days after a bank run led to its swift collapse. In response, the the Biden administration took extraordinary measures to shore up billions of dollars in deposits to contain contagion from spreading across the banking sector.
While the exact nature of the investigation remains unclear, a source familiar said a formal announcement from the Justice Department is expected in the coming days.
According to former federal prosecutors, one area that may intrigue Justice lawyers involves shares sold by top company executives before the bank imploded.
Silicon Valley Bank CEO Greg Becker sold $3.6 million of company stock two weeks before the bank reported massive losses in the run up to the bank's implosion, according to regulatory filings.
"A top company executive engaging in a significant financial transaction so close to a cataclysmic event makes sense as something that would be interesting to prosecutors," said Tamarra Matthews Johnson, a former Justice Department lawyer who is now in private practice.
The sale has triggered new scrutiny of Becker and prompted some politicians to call for him to give the money back.
Becker has not been accused of any wrongdoing in connection with the stock sale. Becker did not return NPR's request for comment.
The Wall Street Journal earlier reported news of the Justice Department investigation.

@AndyJ said:
Oversight and regulation matters. The 2018 change in the regulatory scheme (as detailed on Marketplace Morning Report today) was to move the bank exemption from oversight up from $5 billion or less valuation to $450 billion or less. No stress tests, no risk assessment, nothing.

Twitter is good for a few things!
My favorites
"Just as there are no atheists in Fox Holes, there are also no Libertarians during a financial crisis..."
~Barry @Ritholtz,
https://twitter.com/sruhle/status/1634703830032998400?s=12

It’s easy for investors to dismiss the ripples from the collapse of Silicon Valley Bank SVIB as contained and nothing to worry about when it comes to a broader portfolio.
But if there’s one thing to know about banking crises, it’s that they are never just about the banks. They may start there, but they don’t end there. Easy financial conditions tend to lead to higher risk-taking and a complacency that long-established patterns will continue. Until they don’t.
As Warren Buffett has been known to observe, only when the tide goes out do you see who’s been swimming naked.
The Worry Is Fear
The failure of two major regional banks since Friday threatens to erode investor and consumer confidence to a degree that could spiral in unexpected ways. And with inflation still raging at the highest levels in 40 years and the Federal Reserve raising interest rates at the most accelerated pace since those years, things are starting to break.
“The worry is about fear,” says Tim Murray, capital markets strategist for multi-asset portfolios at investment manager T. Rowe Price.
In good times, too, policymakers get lax and tend to feel like it is safe to repeal or reduce important protections designed to prevent systemic events and consumer safeguards.