The Federal Reserve has injected nearly $300 billion of emergency liquidity into the market in the past week, reaffirming the resilience of the financial system. As the March interest rate meeting approaches, Goldman Sachs has raised the probability of a US recession within 12 months to 35%, and expectations for a rate cut in federal funds rate futures continue to rise. The rate hike and balance sheet reduction were finally broken beyond expectations this week.

On the one hand, the interest rates are being raised, and on the other hand, the balance sheet is being expanded helplessly. On the one hand, there is high inflation, and on the other hand, there is a banking system crisis and the possible economic recession that may be caused.

In order to avoid the mistakes of the 2008 financial crisis, where bank liquidity crisis led to bankruptcy, the Fed’s first goal is to stabilize the financial market as soon as possible.

Since the bankruptcy of Silicon Valley Bank last week, global bank stocks have been in a precarious situation. The potential liquidity crisis caused by insufficient risk control in asset allocation and deposit outflows amid soaring interest rates was once transmitted from the United States to Europe, triggering market concerns about the stability of the financial system.

The Fed's balance sheet expanded from $8.39 trillion to $8.69 trillion, the highest level since November last year. As the Fed's balance sheet expanded beyond expectations, expectations for interest rate hikes plummeted, and whether there will be an interest rate hike next week has become an unknown. The Fed said it is ready to provide liquidity to eligible institutions at any time. JPMorgan Chase believes that the banking crisis may cause the Fed and the European Central Bank to suspend interest rate hikes, and the Fed's rescue plan will provide the market with $460 billion to $2 trillion in liquidity.

At the end of last year, the market bet on the last rate hike in March, which led to a general rise in the market. After several twists and turns, the expectation of the last rate hike in March was raised again this week. The rate hike caused the collapse of US bank liquidity, produced many chain reactions, and also sounded the alarm for the Federal Reserve. After the Federal Reserve expanded its balance sheet beyond expectations, according to statistics from the Chicago Mercantile Exchange, the probability of a 25 basis point rate hike in March is 62%, and the probability of no rate hike is 38% (previously, the probability of a 50 basis point increase was more than 70%, and the expectation of a 50 basis point increase has disappeared). The probability of a cumulative rate hike of 50 basis points by May is 20.7%, and the probability of a cumulative rate hike of 50 basis points by June is 0%. March to May may be the last rate hike.

A bear market is reflected in interest rate hikes and balance sheet reduction, while a bull market is reflected in interest rate expansion and balance sheet expansion. The Federal Reserve has begun to express its stance on interest rate expansion and balance sheet expansion this week, and hope is not far away.