Goldman Sachs says it doesn't expect a Fed interest rate hike in March after Silicon Valley Bank's implosion

• Goldman Sachs now doesn't expect the Fed to hike interest rates at its next meeting on March 21-22.
• Fed chairman Powell previously signaled higher-than-expected rate hikes to cool inflation.
• But the aftermath of the implosion of Silicon Valley Bank is causing uncertainty about the banking sector.

The implosion of Silicon Valley Bank, or SVB, and the resulting panic in the banking sector is expected to thwart the Federal Reserve's hawkish efforts on interest rates, according to one major bank. 

Goldman Sachs now doesn't expect the Federal Open Market Committee to hike interest rates at its next two-day meeting on March 21 and 22. The investment banking giant was previously expecting the US central bank to hike the rate by 25 basis points, or 0.25 percentage points at this meeting.

"In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March," Goldman Sachs analysts wrote in a Sunday note seen by Insider.

Goldman Sachs is still expecting the Fed to deliver 0.25 percentage points rate hikes in May, June, and July with a terminal rate — when officials are expected to end this rate hike cycle — of 5.25% to 5.5%. But it sees "considerable uncertainly about the path."

Goldman Sach's updated analysis comes just days after Fed chair Jerome Powell signaled the central bank is likely to hike rates higher than previously expected.

Interest rate hikes indirectly contributed to SVB's collapse

The central bank already hiked interest rates eight times over the past year to its targeted levels of 4.5% to 4.75% now, indirectly contributing to SVB's collapse.

This is because these hikes made borrowing more expensive, so it hit IPOs and private fundraisings for startups — SVB's primary customer base — amid difficult times in the tech industry.

To meet liquidity needs, SVB's tech clients started withdrawing funds from the bank — so the financial institution started raising funds, selling a $21 billion portfolio last Wednesday.

But, because the prices of bonds have an inverse relationship to interest rates, SVB was facing a $1.8 billion loss on the sale. It then tried to cover losses by seeking to sell stock and issuing related securities. This in turn spurred concerns among tech VCs and founders about Silicon Valley Bank's financial stability, triggering a bank run and sparking fears of contagion in the banking sector.

SVB was shut down by regulators on Friday and taken over by the Federal Deposit Insurance Corporation.

And Goldman Sachs analysts aren't the only ones who think the Fed's interest rate decisions could be affected by Silicon Valley Bank's collapse.

Larry McDonald, the founder of "The Bear Traps Report" told CNBC on Friday that the bank's meltdown could prompt the Fed to cut rates by 1 percentage point by December to guard against contagion in the financial system.