Suderman Says: To raise rates or not, the Fed walks a tightrope

This be one of the most pivotal meetings of Jerome Powell’s tenure as Chairman of the Federal Reserve. The Federal Open Market Committee (FOMC) will discuss whether to stay the course with its monetary tightening at a time when confidence in the nation’s banking system is being tested. On the other hand, policymakers don’t want to repeat mistakes made in the 1980’s when they cut interest rates too soon, allowing inflation to get a tighter grip on the economy that then required even larger rate hikes to get it under control.

Either outcome is fraught with risks: decisions over the next two days are important, as is their tone and words. The Fed has the chance to calm the waters, but any misstatement or nervous tone could pour more fuel on the fires of fear currently smoldering on Wall Street. Equity markets, notably Regional banks’, rebounded after Janet Yellen's comments, while financial markets anxiously awaited the results of the March meeting kicking off today. Markets predict a quarter-point rate increase tomorrow.

Markets stabilize

• Equity markets rebounded by around 1%, with the tech-heavy NASDAQ leading the way
• The VIX, Wall Street’s fear index, fell back to 21.9
• The dollar index ticked up to 103.3, seeming to end a downtrend
• Yields on 2- and 10-year Treasuries rose modestly to 4.18% and 3.59%, respectively

Yellen calms nerves

• Treasury Secretary Janet Yellen said the US government is prepared to step in and protect smaller regional banks if further failures occur, after aiding Silicon Valley and Signature Bank
• "The steps we took (in the previous failures) were not focused on aiding specific banks or classes of banks", and that "similar actions could be warranted" if more small institutions fail

Robust homes sales data

• US Existing Home Sales for February came in at 4.58 million, well above the predicted 4.20 million figure, the largest monthly bounce since mid-2020, snapping a year-long decline as interest rates and prices rose
• Buyers are likely looking for a potential decline in rates, or at least a steadying pace
• The number of homes for sale held steady at 980,000, 2.6 month’s supply, well below the five-month supply that realtors describe as a "tight" market

Commodities stronger, China a major buyer

• Grain markets were stronger, led by the nearby months with old-crop supplies fairly tight across the country, particularly for soybeans
• The US Department of Agriculture (USDA) reported its fifth daily flash corn sale to China in the past six sessions, bringing cumulative sales to 88.5 million bushels
• China also imported 1.5 million metric tons of corn from Brazil over the first two months of this year, making Brazil their main supplier over more expensive US supplies and reduced availability from Ukraine

China cozies up with Russia, condemns Taiwan visit to the US

• China’s President Xi Jinping spent his second day in Moscow today, where Russian President Vladimir Putin welcomed him as his “dear friend”
• Three days of formal and informal talks are expected to see them signing several bilateral agreements, according to news reports
• Taiwan President Tsai Ing-wen plans to visit the US on a planned trip to Central America, a trip China strongly condemns

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com