FOMC Preview: Trapped

And so we are just hours away from the "most important FOMC meeting of the year", one which has been dubbed "Powell's Volcker Moment" and whose decision will test the Fed chair unlike any other because while on one hand, inflation is still rising, on the other the regional banking sector is currently undergoing existential shock with several banks failing in shocking and rapid succession as a result of the Fed's aggressive rate hikes (which in turn a result of the Fed's aggressive easing and non-hikes in 2021) leaving Powell trapped.

Powell trapped: more hikes and CRE leads to tens of billions of incr. losses across banking system (AFS+HTM); small banks now reserve constrained guaranteeing something "breaks." Meanwhile inflation still hot. https://t.co/Nqm3R6RBw0

— zerohedge (@zerohedge) March 9, 2023

Unlike similar affairs in the past year when it was known with certainty that the Fed, in its pursuit of containing runaway inflation (which it created with its catastrophic "transitory inflation" errors of 2021) would hike (either by 25bps, or 50bps, or 75bps), this time there is a wide spectrum of possibilities, with most banks expecting a 25bps rate hike (to which the market currently ascribes 82% odds), while some - such as Goldman and Barclays - expect a pause (as the impairment of small banks will be highly deflationary and not only hit economic growth due to reduced lending by regional banks, but also hammer DGP), while one outlier - Nomura - actually expects a 25bps rate cut tomorrow. Incidentally, as shown below, as recently as March 9, the market was almost convinced we would get a 50bps rate hike, but then the banking system broke, and on Monday - after the collapse of Credit Suisse- odds of a no cut briefly dominated before reversing.