By Geoffrey Smith
Investing.com -- The collapse of three U.S. banks over the last week may deliver the long-awaited 'pivot' from the Federal Reserve as early as next week, according to analysts at Nomura.
The Japanese bank said in a note to clients that, whereas it had previously expected a hike of 50 basis points, the Fed will cut the target range for fed funds by 25 basis points to 4.25%-4.50% at a two-day meeting next Tuesday and Wednesday. It also expects the Fed to pause the reduction of its balance sheet by selling bonds back into the market.
The analysts argued that further measures will be necessary to head off looming financial stability risks, after the announcements made at the weekend failed to stop heavy selling of second-tier bank stocks on Monday. First Republic Bank (NYSE:FRC) stock fell over 60%, despite several halts in trading, while a string of other banks - especially those concentrated on the West Coast, with higher exposure to the technology sector - fell between 20% and 47%. Nomura thinks the central bank may announce a new lending facility on top of the Bank Term Funding Program that it unveiled at the weekend.
Nomura's pivot is the most dramatic seen yet among the major brokerages. Analysts at Goldman Sachs had said at the weekend that they no longer expect a hike at next week's meeting, but had warned that the ongoing strength of inflation would not allow it to start cutting interest rates yet. Morgan Stanley analysts still see a 50 basis point hike as possible. Short-term interest rate futures currently imply a toss-up between either no change or a 25 basis point hike.
The U.S. is due to release consumer price inflation numbers for February at 08:30 ET (12:30 GMT). The CPI is expected to have fallen to 6.0% from 6.4% in January, but any overshoot is likely to be badly received, given that January's number was itself well above forecasts, and given that the jobs report for February last Friday still showed the labor market in rude health.