The expectations of what the Fed will do tomorrow are wild. They have been swinging wildly over the past few days. The implications of the recent bank failures have been a topic of discussion for investors. One main theme is the fact that banks have increased their risk aversion, which has led to higher borrowing costs. This, in turn is equivalent to the central banks raising rates for inflation.
This is a reason that the Fed (and other central bankers) may not raise interest rates, or reduce the number of increases before reaching the terminal rate. The higher interest rates are also putting enormous pressure on banks.
Worries are everywhere
First Republic Bank in the US is still a concern. The bank is currently trading at well below 50% of its normal price. One of the reasons for this is that it likely can’t access the backstop being provided by the Fed to banks. That’s because the Fed set up a mechanism that would allow banks to borrow money on their MBS and Treasury holdings at par value, and eliminate the problem of unrealized losses that led to the collapse of SVB and was putting pressure on other banks.But First Republic’s problem is that…
