Markets may be in a vulnerable position ahead of the Federal Reserve’s meeting this week, as traders bet the banking crisis could lead to meaningful interest-rate cuts over the next year. The Fed, which on March 12 announced the creation of its emergency Bank Term Funding Program to help banks meet the needs of their depositors following the collapse of California’s Silicon Valley Bank and New York’s Signature Bank, will hold a two-day policy meeting this week. Fed Chair Jerome Powell will host a press conference after it concludes on Wednesday.
“A lot of people thought that because there was a banking crisis, it would cause the Fed to start easing monetary policy” in the coming months, said Bob Elliott, chief executive officer and chief investment officer of Unlimited Funds, by phone. He pointed to fed-fund futures, saying they show “interest rates are priced to be cut meaningfully over the course of the next year.” But in his view, the Fed’s emergency measures helped stabilize the financial system, giving it room “to go and fight the inflation that remains too high in the economy.” The Fed “should be tightening monetary policy,” he said. Yet economic expansion in the U.S. and inflationary pressure tied to wage growth don’t align with traders’ expectations for rate cuts over the next 12 months, according to Elliott. That leaves markets at risk, he thinks. “The problem is that you could easily get tighter monetary policy being priced in, which would hurt both stocks and bonds,” said Elliott. He said he sees the regional bank failures stemming from “mismanagement b …