One of the best ways to figure out what the Fed will do next is to look at regional bank stocks

Markets have changed their mind — again — about what they think the Federal Reserve will do next week regarding interest rates.

In a morning where more banking turmoil emerged and stocks opened sharply lower on Wall Street, traders shifted pricing to indicate that the Fed may hold the line when it meets March 21-22.

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The probability for no rate hike shot up to as high as 65%, according to CME Group data Wednesday morning. Trading was volatile, though, and the latest moves suggested nearly a 50-50 split between no rate hike and a 0.25 percentage point move. For most of Tuesday, markets indicated a strong likelihood of an increase.

Chairman Jerome Powell and his fellow Fed policymakers will resolve the question over raising rates by watching macroeconomic reports that continue to flow in, as well as data from regional banks and their share prices that could provide larger clues about the health of the financial sector.

Smaller banks have been under intense pressure in recent days, following the closures of Silicon Valley Bank and Signature Bank, the second- and third-largest failures in U.S. history. The SPDR Regional Bank ETF fell another 1.5% on Wednesday and is down more than 23% over the past five trading days.

In a dramatic move Sunday evening, the central bank launched an initiative it called the Bank Term Funding Program. That will provide a facility for banks to exchange high-quality collateral for loans so they can ensure operations.

Inflows to impacted banks could be reflected through their share prices to indicate how well the Fed’s initiative is working out to maintain confidence in the industry and keep money flowing.

Central bank officials also will get data in coming days to see how active banks are in using the facility.

If banks are using the BTFP to a large extent, that could indicate significant liquidity issues and thus serve as a deterrent to raising rates. The last public report on that data will come Thursday, though the Fed will be able to monitor the program right up until its two-day meeting starts Tuesday.

The wagers on which way the Fed ultimately will go followed a rocky morning on Wall Street. Stocks were sharply lower in early trading, with the Dow Jones Industrial Average down more than 500 points.

Just as concerns started to diminish concerning banking sector health, news came that Credit Suisse may need a lifeline. Switzerland’s second-largest bank slumped after a major Saudi investor said it would not provide more capital due to regulatory issues.

The slump came even as economic data seemed to lessen the urgency around controlling inflation.

The producer price index, a measure of wholesale pipeline prices, unexpectedly dropped 0.1% in February, according to the Labor Department. While markets don’t often pay much attention to the PPI, the Fed considers it a leading indicator on inflation pressures.

On an annual basis, the PPI gain dropped to 4.6%, a big slide from the 5.7% reading in January that itself was revised lower. The PPI peaked at a rate of 11.6% in March 2022; the February reading was the lowest going back to March 2021. Excluding food and energy, the core PPI was flat on the month and up 4.4% year over year, down from 5% in January.

“The strong likelihood of continued rapid core PPI disinflation is at the heart of our relatively optimistic take on core [personal consumption expenditures] inflation and, ultimately, Fed policy,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Markets don’t pay much attention to the PPI, but the Fed does.”

The PPI data coupled with a relatively tame consumer price index report Tuesday. Markets last week were pricing in a potential half-point rate hike this month, but quickly pulled back.