The past two weeks have been a constant swing from one extreme to the other in terms of interest rate trajectory forecasts. In early March, most investors expected the Federal Reserve to raise interest rates by another 25 basis points within a month, to a range of 4.75% to 5%.

The collapse of Silicon Valley Bank (SVB) turned this harmony into dissonance. Some economists now expect Fed Chairman Jerome Powell to delay raising or even cut interest rates to ease the strain on banks. With inflation still overheating, such a reversal would do more harm than good.

While markets are expecting a pullback or even a pause in rate hikes, Powell is likely to surprise them.

Last week, Powell’s aggressive upswing brought the first losses among banks, as rising interest rates and falling Treasury prices, combined with poor risk management, sent SVB into a death spiral.

The federal government has taken emergency action to prevent such outbreaks, but the dissolution of the SVB casts a shadow over the Fed’s upcoming interest rate decision. Economists at Goldman Sachs and Barclays have abandoned their rate hike forecasts and now expect the Federal Reserve to keep rates unchanged at its March 22 meeting. And Nomura, which has gone further, changes its half-percentage hike forecast and forecasts a quarter-point rate cut.

Investors followed suit. According to the CME FedWatch tool, futures are priced at a 35% chance that interest rate hikes will end in March, while there is a 65% chance of a quarter percentage point hike. Just a week ago, the markets “saw” a 70% chance of a 50bp uptrend. However, it should be noted here that a rate cut or even a pause runs counter to the Fed’s broader mission. US consumer prices rose 6% in the 12 months from March 2022 to February 2023. This is three times the inflation target of the Federal Reserve. Interest rates remain Powell’s best tool to deal with rising prices. A premature change in this course would damage both the US economy and the credibility of the Fed.