A 180-degree turn for the Fed, the US federal central bank? Her bankruptcy Silicon Valley Bank (SVB) may lead to a slowdown, if not an end, to raising its key interest rates, which were expected to rise even more just a few 24 hours ago.

“Recent developments significantly increase the likelihood that (the Fed) will refrain from raising interest rates on March 22” at its upcoming monetary policy meeting, Wells Fargo analysts said in a note.

They now expect interest rates to remain at their current level, in the range of 4.50 to 4.75%.

As the bankruptcy in recent days of SVB and two smaller financial institutions, Signature Bank and Silvergate Bank, have sent shivers through the banking world and, more broadly, the world of financial services.

These expectations reflect a rapid and spectacular reversal of the situation that prevailed just a week earlier. Federal Reserve Chairman Jerome Powell warned that inflation remained persistently high and that interest rates could rise more than expected.

The vast majority of market players thus predicted a large increase of half a percentage point (or 50 basis points). Double the previous one, which was a quarter of a percentage point (25 basis points).

“More progressive approach”

“The week began with Jerome Powell hinting at (…) an even more aggressive policy response and ended with the collapse of two mid-sized US banks,” of SVB and Signature Bank, Neil Shearing, chief economist at Capital Economics, summarized in a briefing note.

In his assessment, “the delays with which (the central bank’s) policy brings results is a reason to adopt a more progressive approach (…) starting now.”

As the Fed’s current priority is to reduce inflation, which reached 6.4% year-on-year in January, according to the benchmark CPI index. Data for February is expected to be released later today.

For this reason, it has been increasing its key interest rate for a year now, which determined the cost of credit to reduce consumption. A decision with limited effectiveness so far.

However the impact of her actions takes months before it is fully felt. And the red flag of recession is often looming.

The Fed is ready to “tighten until something breaks. The collapse of SVB and the nationalization of Signature Bank are signs that something is starting to happen,” comments John Caravan, economist at Oxford Economics.

“Let’s not rush”

It may not be inflation or employment data, but bank failures that will weigh heavily on Fed policy.

The Fed may not raise interest rates further until “financial markets and the banking system show signs of stabilization,” according to analysts at Wells Fargo.

But some caution: “those who think the Fed will end its tightening cycle sooner because of the current turmoil in the banking sector may be deluded,” Gregory Dako, an economist at EY Parthenon, noted in a note.

While “recent developments would likely favor a rate hike” of 25 basis points, “let’s not be too quick to rule out the possibility of a 50 basis point rate hike,” he added.

More than a third of market players expect a pause next week for the first time since 2022, CME Group estimates. The other two-thirds, however, expect an increase of 25 basis points.

A wave of bank runs caused the bankruptcy of three US banks last week, including SVB, which was unable to cope with customers’ demands for their money back and was closed on Friday by the decision of the supervisory authorities.

The latter announced on Sunday a series of measures to reassure savers and businesses about the stability of the American banking system, notably guaranteeing the ability to withdraw all deposits at SVB.