Its seizure by regulators, which marked the biggest bank failure since the 2008 crisis, is triggering a rapid recalculation on trading desks of how willing the Fed will be to keep tightening to tame inflation. Traders are now betting that the Fed will hike just once more or not at all this year — a staggering about-face from speculation last week about how large the next increase would be.
“Now we are starting to feel finally those long and variable lags with which monetary policy works,” Blerina Uruci, chief US economist at T. Rowe Price Associates, told Bloomberg Television Friday. “The first sign of that is, I think, what we are seeing with the Silicon Valley Bank here. Lots of businesses and banks – we are going to find this year – aren’t able to operate at these higher interest rates.
History shows that the road for rate hikes to have a meaningful impact on the economy can be bumpy and lengthy. As well as so many mortgage rates locked in at low levels, there are also issues on the labor market side of things, Madziyire said. Labor market participation is super tight given so many people decided to retire early during the pandemic and immigration was restricted for a long time.
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