FOMC Preview: Inflation (and First Republic) Collapse

Markets imply a 25 bp hike at Wednesday’s FOMC, a pause in June, and then 4 rate cuts by January. With the failure of First Republic, we continue to think there’s a chance of no hike Wednesday. We don’t see why the FOMC would tighten the screws on banks that currently have borrowed $152 billion in emergency funds from the Fed already – or, for that matter, why the Fed would worsen its own negative net interest margin running now at $10.2 billion per month. On Friday PCE goods inflation, at 1.62% year-on-year, became the first major sector to achieve and move below the Fed’s 2% target, having been at almost 11% just nine months ago. On a 1-month and 3-month basis, services and core services excluding shelter are both below 3%. The market-implied path of rate cuts can be attained now without a hard-landing recession to justify them, as the Fed changes course based on the combination of bank stress and collapsing inflation.