Investors Bet on Fed Raising Interest Rates After First Republic Failure

The Federal Reserve is anticipated by investors to again increase interest rates this week following the collapse of another major bank—the third this year.

First Republic Bank was closed, seized by regulators on Monday and all of its deposits and assets have now become the responsibility of JPMorgan Chase following a sale. All depositors will still have access to their money but through accounts facilitated through JPMorgan Chase.

The bank collapse is the second-largest bank failure in U.S. history and culminates a rough two-month stretch that has also included the central bank collapses of Silicon Valley Bank and Signature Bank—three of the four largest bank failures ever, along with Washington Mutual, which went down in 2008 during the banking crisis and was also taken over by JPMorgan Chase.

"Our government invited us and others to step up, and we did," Jamie Dimon, chairman of JPMorgan Chase, said in a statement. "Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund."

First Republic shares fell 75 percent last week and closed Friday at $3.51 per share, reported CBS News, weeks after shares traded at $115 on March 8 prior to the failing of Silicon Valley Bank.

A Federal Open Market Committee (FOMC) meeting is taking place this Wednesday when numerous investors and analysts expect the Fed to hike interest rate .25 basis points to a range of 5.0-5.25 percent.

If it does occur, it would be the 10th consecutive rate hike conducted since March 2022 when the Fed began raising interest rates when the rate was near zero. Rate hikes were initially a response to a stagnant economy heavily impacted by record levels of inflation in the waning months of the COVID pandemic.

The Fed previously raised rates in March by a quarter point. Another hike would lift the benchmark federal funds rate to a 16-year high, according to the Wall Street Journal.

A spokesperson for the Fed, which normally does not comment on monetary policy decisions before FOMC meetings, declined to comment to Newsweek on potential rate increases in emailed correspondence.

CME Group, a global derivatives market based in Chicago, has a live probability chart based on analyzing Fed rates and U.S. monetary policy. On Monday, following the collapse of First Republic Bank, the chart showed the possibility of a Fed rate hike as fluctuating between 88 and 92 percent.

"This particular meeting is going to come down to what the Fed will do versus what the Fed should do," Jamie Cox, managing partner for Harris Financial Group, told Newsweek via phone on Monday. "The Fed should stop and pause rates. The cumulative effect of rate hikes is not yet felt in the economy, but it's starting to have deleterious unintended consequences—like the banking crisis.

"And going another 25 basis points doesn't make that better; it just makes it worse."

Fed officials "are more fearful of being labeled Arthur Burns," Cox added, referencing the former Fed chairman who served during inflation-ridden years between 1970 and 1978. They would rather go further and risk a recession to combat inflation, he added.

"They want to be able to say that they were 100 percent committed to killing inflation, that even in the face of a difficult circumstance they continue to be the face of inflation fighters," he said. "And that means more to them because they want to communicate to markets that they are absolutely committed to bringing inflation down. And that speaks volumes."

The Fed will also signal that it likely won't cut rates as swiftly as the markets may hope, Cox said, with hikes occurring in the first quarter of 2024 instead of this year.

"So basically, people need to get adjusted for rates which are persistently higher than what is anticipated in the market, at least for the next six, eight months," he said.

Andrew Lieb, an attorney and founder of the real-estate focused Lieb School in New York, told Newsweek via email on Monday that the Fed's decision will have a continued effect on the real estate market.

"The quick answer is those with assets will get great bargains and those without will get squeezed," Lieb said. "Borrowing for success isn't an option these days so cash purchasers of real estate can really come hard in their negotiations...While we all can't be JPMorgan and acquire First Republic at a discount, we can and should shop real estate and seize the opportunities that this market is presenting."

First Republic Bank "has been on life support for a month or so," Cox added, saying that the question of a collapse "wasn't if, but when."

Newsweek reached out to the U.S. Treasury via email for comment.