The US Central Bank is expected to raise the key dollar rate

In general, the Fed meeting was held within expectations and without any surprises. The US Central Bank is expected to raise the key dollar rate by 25 bps, to 5%. In addition, the Fed confirmed its plan to reduce assets on the balance sheet by $95 billion per month.

Note that this does not prevent the Fed from increasing the balance sheet with the other hand by providing liquidity to banks affected by the crisis (+$300 billion for the week to March 13). As a result of the banking crisis, the Federal Reserve has softened the signal about future actions and now believes that "some further tightening of the PREP may be justified." At the same time, the median forecast for the Fed's peak rate this year is left at 5.25%. Thus, the Central Bank predicts another rate increase of 25 bps and does not expect rate cuts.

We believe that if the financial crisis does not escalate, then at the next meeting on May 3, the Fed may raise the key dollar rate by 25 bps for the last time, to 5.25%. If the situation in the financial system worsens, the Fed is likely to move to a rate cut soon.

In our opinion, the probability of maintaining the rate at the next meeting on May 3 and an increase by 25 bps is now about the same.

At the same time, we expect further aggravation of the situation in the American, European and global financial system, and we believe that the probability of a financial crisis is high.

The Fed's fastest tightening cycle in 40 years is putting pressure on the banking sector and other financial institutions. Following the bankruptcy of SVB and Signature banks, problems are now visible at First Republic Bank and PacWest Bank. In addition, now about 200 banks are experiencing the same problems as SVB.

Therefore, we do not exclude that by the May meeting, the banking crisis will worsen even more and the Fed will prepare the markets for a cycle of easing the PREP.

We share the market's point of view that already this year the Fed will begin to reduce the key dollar rate. The scale of the rate cut will depend on the depth of the financial crisis and recession. The market is still laying the Fed rate cut by 75 bps, to 4.25% by the end of the year.

It should be noted that yesterday's fall in the markets was largely caused by the statement of the head of the US Treasury. J. Yellen said that the US Treasury is not considering the possibility of temporarily extending the guarantee coverage of the Federal Deposit Insurance Corporation (FDIC) to all deposits, including deposits over $ 250 thousand.

The markets, like us, believe that the risks of a financial crisis are high. Thus, the March survey of global portfolio managers conducted by Bank of America showed that the main risk for the markets now is not high inflation, but a systemic credit event due to the banking crisis.