The Fed begins its March FOMC meeting today.
Tomorrow at 2:00 p.m. EDT, the Fed will announce its policy decision for the month. And no matter what the Fed does, it’s in SERIOUS trouble.
If the Fed raises rates, it will only increase the pressure on the banking system.
Depositors in both the US and Europe are fleeing banks because A) banks pay next to nothing in interest, when you can earn 3% to 4% in a money market fund or treasury bills short-term and B) depositors are now terrified that the banks they keep their money in might fail.
Consider that the United States just experienced its 2nd and 3rd largest bank failures in history over the past two weeks. And over the weekend, the $1.4 trillion giant Credit Suisse had to be rescued by UBS and the Swiss government.
Simply put, the problems that caused Silicon Valley Bank and Credit Suisse to fail/needed to be rescued will only get worse if the Fed decides to raise rates again tomorrow.
The alternative for the Fed is not much better.
Inflation currently stands at 6%.
If the Fed doesn’t raise rates tomorrow, then inflation rage.
I’m talking about a situation in which the United States becomes an emerging market, with inflation out of control, a currency crash, and more.
Simply put, the Fed is screwed anyway.
Yes, if the Fed does not raise rates tomorrow, there will be a rally in risk assets. But that relief will quickly turn to terror as US Treasury yields explode higher.
Remember that the United States has over $31 trillion in debt and a debt-to-GDP ratio of 120%. There are over $70 trillion in debt securities in the financial system and An additional $500 trillion in derivatives that trade based on interest rates.
What will happen to all that debt if the 10-year US Treasury yield jumps to 7% or even 9% if the Fed lets inflation run wild for fear of worsening the banking crisis?