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Market Recap – March 20, 2023

Keel Point

March 1, 2023

The Fed’s Open Market Committee meets this week and will most likely decide to increase its Fed funds target another 25 basis points, bringing it to 4.75%-5%, while acknowledging their readiness to adjust rate increases if banking system stability requires it.

  • The Fed’s vigorous efforts to wring inflation out of the U.S. economy (increasing its Fed funds rate from 0% to a target range of 4.5-4.75% over the past 12 months) and quantitative tightening caused two banks to “break,” stressed a broad spectrum of small- to mid-sized banks, and exacerbated ongoing problems in Credit Suisse – a systemically important bank.
  • Longer-dated government-backed securities held in the banking system had surged to $5.5 trillion, and as interest rates increased, unrealized losses on these securities rose – totaling $690 billion by September 30, 2022.
  • Deposits are leaving the banking system for diversified, safer, higher yielding alternatives, and, at the same time, banks are tightening lending requirements, reducing lending, and augmenting the Fed’s efforts to reduce liquidity in financial markets.
  • Fed Chair Powell’s March 7-8 congressional testimony indicated that inflationary pressures were running higher than expected, and that interest rates would need to be higher for longer. The February CPI inflation report last week didn’t show as much disinflation as hoped for.

At the end of last week, Fed funds futures were evenly split on a 25 bp increase this week versus no increase, but they also are reflecting expectations of rate cuts by as much as 100 basis points by the end of the year.

  • A sense of calm was returning by the end of last week although the Fed’s March 16 weekly balance sheet report showed emergency loans outstanding at $318 billion (up from $15 billion the prior week), Discount Window loans at a record $153 bn, and $143 bn in new loans guaranteed by the FDIC.
  • Barring new problems developing early this week, we believe the Fed will move forward with its planned rate increase, but only by 25 basis points. We expect, however, that the updated quarterly Summary of Economic Projects will show additional rate increases at future meetings, if required.


Disclosure: Securities offered through Keel Point Capital, LLC, Member FINRA and SPIC. Brokerage and Investment advisory Services are offered under the Keel Point brand. Investment Advisory services offered by Keel Point, LLC an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.

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