March FOMC meeting and SVB incident- weekly market recap, Mar 20-24

https://www.cmswire.com/customer-experience/silicon-valley-bank-collapse-unraveling-the-impact-on-cx-and-startup-ecosystem/

​​The FOMC meeting that took place on March 22 was one of the most important economic events this year.

Recently, the collapse of Silicon Valley Bank shocked the market, and people started to worry if this was the beginning of another banking system meltdown, or Lehman Brothers 2.0. One of the reasons that caused Silicon Valley Bank to fail is that they have small assets compared to large liabilities. As most banks function, Silicon Valley Bank only kept a small portion of cash while buying a lot of treasury bonds to pursue a steady return. However, as the Fed began to raise interest rates to try and fight inflation last year, those newer government bonds with higher interest payments become a more attractive investment to the market, causing challenges to the banks.

Hence, the whole world was waiting on the Fed’s attitude, and possibly a changing course in terms of the short-run and long-run rate hike decision. In the end, Fed announced an expected 25 basis points interest rate raise, along with comments regarding the current and future economy. Jerome Powell, chair of the Board of Governors of the Fed, claimed that Silicon Valley Bank and other banks that have financial issues do not represent the entire system, and the overall banking system is still relatively healthy. However, they will monitor the bank sectors closely and will consider the possibility to pause the rate hike in the next period.

With this being said, Fed's ultimate goal is still aimed to keep inflation at 2%, and will use all the tools to achieve this. Thus, despite the chance to have only one more rate hike, Fed’s attitude is still leaning toward a possibly higher than estimated year-end policy rate as inflation is still an issue. Powell also mentioned the market shouldn’t expect a reduction in interest rates until next year at the earliest.

https://www.usatoday.com/in-depth/graphics/2022/10/31/fed-markets-how-sp-500-moved-each-rate-increase/10614448002/

Articles

Giang, V. (2023). Banking Turmoil: What We Know. New York Times. https://www.nytimes.com/article/svb-silicon-valley-bank-explainer.html

Mercado, D. (2023). Fed recap: All the market-moving comments from Fed Chair Powell after rate hike. CNBC. https://www.cnbc.com/2023/03/22/live-updates-fed-rate-march.html

Liang's comment

Fed's attitude on the short-term future rate hike is relatively dovish, as the current federal fund rate at 4.75%- 5% has shown difficulties in the banking sectors. Fed needs to be extremely careful to prevent a systematic economic collapse. As a result, we should be able to continue the rally we've seen so far in 2023. Even if the market struggles to push higher, we could at least expect a big drawn down that happened frequently in 2022 that probably won't happen in the short run.

However, Powell kept emphasizing that Fed's goal is to keep the interest rate at 2% and suggested that the terminal interest rate should be higher than expected. We should be aware Fed is still hawkish on the use of monetary policy to bring inflation down. Hence, for the stock market, we can't be sure we have seen the bottom yet, which another drawback could still be seen later this year. The next things to pay attention to are March CPI data released on April 12, and further news on tech giants' layoff trend as FED wanted to see a certain degree of unemployment.

https://www.tradingview.com/chart/lINnSfWv/?symbol=NASDAQ%3AQQQ (lines drawn by me)

$QQQ is ETF tracking of the NASDAQ index. It shows the typical intraday movement during FOMC, which the volume would surge and the movement would be quick, big but ambiguous for a long while. It's extremely risky to make trades during this day, especially for day traders and options traders.