March 13, 2023
The Fed’s decision to provide liquidity has markets speculating the central bank may elect to leave rates unchanged when it meets next week. Prior to last Wednesday, markets were pricing in a ~70% probability of a 50bp March rate hike. Fed rate hikes have been the driving force behind higher near-term bond yields, while the Fed’s QT operation has greater influence on longer dated yields and created greater damage to bank assets. If the Fed wants to continue retraining aggregate demand and avoid more degradation of bank assets, it would choose to continue with rate hikes and curtail QT operations. Moreover, the purpose of BTFP is to prevent further liquidity events at banks with the optionality to continue hiking interest rates. Pricing in no March rate hike likely requires a cooler-than-expected CPI print tomorrow. Consensus is looking for a +0.4% MoM increase and +6% YoY increase in February headline CPI.