Upon Signature Bank, SVB collapses, Wall Street divided about the Fed’s next move.

The collapse of Signature Bank and SVB has economists divided on whether it would affect the Fed’s decision to hike interest rates later this month. Policymakers are now dealing with financial panic and persistent inflation.

The debate started late Sunday with anticipations that the Fed won’t raise rates at the conclusion of its next policy meeting on March 22. In light of recent stress in the banking system, some analysts no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path of meetings beyond March.

Markets are currently pricing in a ~70% chance the Fed raise rates by 25 basis points on March 22 policy with a ~30% chance the Fed leaves rates unchanged. Another team of economists believe that a 50 basis point hike is probable next week, though they cautioned more signs of distress linked to Silicon Valley Bank could make the FOMC more cautious.

The financial sector was under pressure early Monday with smaller regional banks bearing the brunt of the selling pressure as investors fear other firms may face the same fate as SVB, Signature Bank as well as Silvergate.

The government’s announcement late Sunday all SVB depositors would be made whole also noted Signature Bank had also been seized by regulators, which took over SVB Friday morning. Silvergate announced plans to liquidate and wind down operations last week.

Extreme data dependence means that policymakers will consciously, or subconsciously, continue to look confirmation of their priors in economic data. On Monday also, Bank of America’s economists reiterated a call for the Fed to raise interest rates by 25 basis points on March 22 following this weekend’s events.

On Tuesday morning, key inflation data for February will likely solidify in the minds of investors and economists the magnitude of the Fed’s next step. Expectations are headline inflation will rise by 6% over last year, which would be the slowest annual increase since September 2021, but still three times higher than the Fed’s 2% inflation target.

The Fed’s focus on inflation and the labour market in setting policy will be put to a unique challenge next week as the central bank manages its so-called third mandate of financial stability.