Investors Await Fed's Decision Amidst Inflation Concerns and Banking System Risks

Oil prices hold steady as investors remain optimistic amid banking crisis containment and cautious Fed policy

By Ahmed Azzam | @3zzamous | 22 March 2023

  • WTI crude futures holding steady above $69 per barrel, boosted by positive market sentiment

  • US Fed faces the challenge of addressing financial stability concerns while prioritizing inflation considerations

  • A pause or cut by the Fed may trigger panic and weaken the US dollar

What’s happened in the markets?

WTI crude futures held steady above $69 per barrel as investors remained optimistic about the containment of the banking crisis and the US Federal Reserve's cautious policy approach. US Treasury Secretary Janet Yellen's commitment to protecting deposits has also boosted sentiment. Meanwhile, the market continues to expect China, the top crude importer, to drive global oil demand. Russia's announcement that it will maintain its output reduction through June has also provided support.

The annual inflation rate in Canada fell to 5.2% in February 2023, below market expectations of 5.4% and slowing from the 5.9% in the previous month. Transportation and shelter costs both slowed down, while food costs remained elevated due to adverse weather conditions. On a monthly basis, the Canadian CPI rose by 0.4%, slowing from the 0.5% increase in the previous month.

What to watch?

The Federal Reserve must address current financial stability concerns while still prioritizing their inflation considerations. The latest US Feb. CPI data reveals that services inflation has remained persistent, with the "supercore" metric preferred by Powell indicating a surge of 0.5% from 0.36%, reaching its highest level since September. This validates the Fed's decision to continue hiking rates based on new data. However, investors are keeping a close eye on two things: whether the Fed will raise rates by 25 basis points or maintain the status quo, and how the Fed will communicate their level of concern about the recent events and funding crisis risk in the banking system. This will be crucial in determining the trajectory of rates and QT going forward. Today's dot plot will be essential, as the market has already priced in a Fed rate cut of more than 75 basis points by year-end, with expectations for a 25bps rate hike today. A pause or cut by the Fed may trigger further panic and weaken the US dollar, especially given that the ECB chose to increase rates by 50bps earlier this month.