Hobson’s Choice is defined as “a choice of taking what is available or nothing at all” which is where we feel the Fed is standing at the present moment. The Fed currently holds its benchmark funds rate, which banks charge each other for short-term lending, is at 4.58% today compared to 0.33% last year and is lower than the long-term average of 4.60%.

We are in this position because of tremendous volatility in the Financial Markets since last week with the failure of three medium sized US banks viz. Silicon Valley Bank, Signature Bank and Silvergate Bank along with well publicized issues with Credit Suisse who are reportedly being bought out by their Swiss competitor UBS with Swiss Government support. Based on direction from the White House, the Fed has moved effectively to shore up market sentiment and is working on bailing out these Banks at the minimum.

The Fed now faces a Hobson’s Choice that can affect both High Street and Wall Street – if they move ahead with a big hike of 50 Basis Points in tomorrow’s FOMC meeting, the Markets could react negatively as they have been doing for a while now. However, if the Fed decides not to hike and pause in this meeting, then there is a possibility that the Markets may assume that the Banking situation has some hidden risks, since the Fed has halted its earlier telegraphed rate hike, and the markets could react adversely too!

However, we believe, that the Fed’s decision should be data driven and not based on sentiment or other extraneous circumstances. Even though we have had issues with the Banking Sector, which seems to have eased now, along with the fact that Inflation has not yet shown any sign of abating, it is our considered view that the Fed should take the middle path, that will address both sides of the Hobson’s Choice, and raise rate by 25 basis points.

Hence, it is our view that this balanced approach will satisfy the part of the market that wants to see a semblance of Business as Usual in terms of Fed fighting inflation by increasing rates and will also satisfy the part of the market by reassuring that there are no hidden red flags indicating Banking Sector Issues contagion.

The period until the next meeting can be used to observe market conditions and consolidate loss reversals which we expect will occur unless we have other hidden negative surprises in store from the Banking Sector. This course of action, to only raise rate by 25 basis points in tomorrow FOMC Meeting, will also in our opinion, improve Fed’s credibility by showing a willingness to change its view as macro-economic and financial market conditions change.