Rate Cut, Not Hike? You Heard It Right! Nomura Projects Fed Will Trim Rates Next Week

Japan’s top brokerage Nomura has reportedly projected the Federal Reserve will cut interest rates next week and will halt quantitative tightening as policymakers evaluate financial stability risks in the wake of the Silicon Valley Bank collapse.

What Happened: Nomura analysts had earlier forecast a 50 basis point rate hike by the Fed during its March meeting but now expect a 25 bps cut, stated a Reuters report, published by Yahoo Finance.

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However, if the consumer price inflation print for February comes in higher, the central bank will find itself in a big dilemma. The question, then, would be whether to prioritize inflation fight and hike rates or hold rate hike for the time being till policymakers are able to clearly evaluate risks to financial stability.

Some relief did appear in the form of the February 2023 Survey of Consumer Expectations released by the Federal Reserve Bank of New York's Center for Microeconomic Data that showed inflation expectations decreased sharply at the short-term horizon. Median inflation expectations dropped by 0.8 percentage point at the one-year-ahead horizon to 4.2%, it said.

Banking and financial stocks have been taking a hard beating over the last few days as investors weighed-in the prospect of the crisis turning into a contagion. Market participants, however, also began considering the possibility of no rate hikes in the March Fed policy given the ongoing crisis.

Price Action: As a result, major Wall Street indices closed mixed on Monday with the SPDR S&P 500 ETF Trust SPY closing 0.14% lower and the Invesco QQQ Trust Series 1 QQQ gaining 0.74%.

Experts have been calling for immediate short-terms steps by the government to limit any potential contagion. Former Treasury Secretary Lawrence Summers reportedly said that the government must take immediate steps to ensure depositors get their money back and should also inspect institutions that are struggling.

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