Silver lining in Silicon Valley Bank crisis: Fed likely to pause rate hike next week, says Goldman Sachs

Silicon Valley Bank collapse might be a blessing in disguise for US markets as Goldman Sachs expects US Federal Reserve to pause rate hike during its FOMC meet next week. 

Goldman Sachs predicts Fed will pause rate rises later this month due to banking system stress. “In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March," said the investment bank. Goldman Sachs analysts said they no longer expect the Fed to raise rates by 25 basis points at its next policy meeting on March 21-22, reported Reuters on Monday

Earlier there were expectations of Fed going for a 50 bps rate hike with a flurry of US economic data indicating the need for a higher rate hike. Traders currently see a 50% chance of no rate hike at the Fed's meeting next week, with rate cuts priced in for the second half of the year, reported Reuters on Monday.

Last week, Federal Reserve Chair Jerome Powell warned that US interest rates might need to go up even faster and higher than expected to rein in stubborn inflation.

Powell told lawmakers on Capitol Hill that recent US economic data was stronger than expected and so the speed and size of future hikes may also need to increase, which sent short-term US rate expectations surging.

However, with the Fed's relentless rate hikes of 2022 being responsible, at least partly, for the SVB crisis might force a rethink on rate hike on March 22, reported UK's Financial Times. 

The US Federal Deposit Insurance Corporation has transferred all deposits of Silicon Valley Bank
 to a newly created bridge bank and all depositors will have access to their money beginning Monday morning, the financial regulator said.

In a statement, the FDIC said all customers of SVB would automatically become customers of the bridge bank, which will hold "normal banking hours and activities, including online banking."

The regulator has also tapped former Fannie Mae head Tim Mayopoulos as the chief executive officer of the newly created entity, it said.

President Joe Biden declared the US banking system "safe" and vowed stiffer bank regulation, after US regulators were forced to step in with a series of emergency measures after Silicon Valley Bank and Signature Bank collapse, threatening to trigger a broader crisis.

"Americans can have confidence that the banking system is safe. Your deposits will be there when you need them," Biden said.

The managers of the banks will be fired, Biden noted, and investors will lose money. "They knowingly took a risk, and when the risk didn't pay off his adjusters lose their money. That's how capitalism works," he said.

US stock indexes fell on Monday as the collapse of Silicon Valley bank fanned fears of a contagion with trading halted in several banks, while expectations rose for a pause in interest rate hikes by the Federal Reserve in March.

The sudden shutdown of SVB Financial on Friday after a failed capital raise triggered concerns about risks to other banks from the Federal Reserve's sharpest rate hike cycle since the early 1980s.

Shares of big US banks including JPMorgan Chase & Co, Morgan Stanley and Bank of America fell between 2.8% and 6.3%.

With inputs from Reuters

ALSO READ: How RBI and US Fed navigated fallout from the collapse of two mid-sized banks