Markets Anxiously Await Fed's Interest Rate Call After Bank Failures Rattle Wall Street

Federal Reserve Chair Jerome Powell said the central bank remains data dependent in testimony to Congress at the beginning of the month, but potential contagion in the banking system since then might weigh more heavily on the Fed's decision this week.

Markets Anticipate 0.25% Hike: A critical Federal Open Market Committee interest rate decision is due at 2 p.m. ET Wednesday. The Fed will have to weigh cross currents when it considers the magnitude of its next rate hike.

The bond market is currently projecting a 79% chance of a 0.25% increase and a 21% chance the Fed will opt for a pause, per CME Group data. 

The Fed Chair told Congress in early March that getting inflation back down to 2% is likely to be "bumpy" and said the process still has "a long way to go."

"We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation," Powell said in an exchange with lawmakers.

He noted the Fed would be paying close attention to jobs data as well as incoming Consumer Price Index and Producer Price Index prints. The CPI was in line with economist expectations, coming in at a 6% year-over-year increase in February. 

Jobs data last week showed the labor market remains hot. The U.S. added 311,000 jobs last month, which came in much higher than average economist estimates of 200,000 jobs.

PPI data was encouraging, as it unexpectedly fell 0.1% in February versus estimates for a 0.3% increase. 

From Last Week: PPI Inflation, February Retail Sales Data Raise Market Expectations For Fed Pivot

Bank Failures Inject Uncertainty: Chances for a sharp 0.5% hike steadily climbed earlier this month amid the Fed's semiannual Monetary Policy Report and hawkish comments from the Fed Chair before a series of bank runs completely changed market expectations.

The market was teetering between expectations for a 0.5% increase and a 0.25% increase, but now it appears a 0.5% hike is completely off the table. 

Lingering uncertainty surrounding potential contagion in the banking system is likely to push the Fed to opt for a less aggressive 0.25% hike at most. A pause remains a possibility, but the consensus seems to be favoring a 0.25% increase.

See Also: As Fed Decision Looms, Larry Summers Makes The Case For 25-Basis-Point Hike And Applauds Christine Lagarde

Following Wednesday's FOMC meeting, the Fed won't be due to make another decision on rates until May. 

SPY Price Action: The SPDR S&P 500 SPY is trading higher ahead of the Fed decision, but it's still down over the last month.

The SPY was up 0.66% at $396.30 at the time of writing, according to Benzinga Pro.

Photo: Rafael Saldaña from Flickr.