Could the Fed Have Any Less Credibility?
Could the Fed Have Any Less Credibility?
3-12-23
It has been a whirlwind week with substantial market moves and big swings in rates, bank stocks and market sentiment. Days ago, Fed officials were considering a 50bps hike and then we are using taxpayer money to bailout banks days later. On Sunday am, Treasury Secretary Yellen said, “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place means that we’re not going to do that again,” Yellen told CBS’ “Face the Nation.” “But we are concerned about depositors and are focused on trying to meet their needs.” Hours later, in a joint statement by the Treasury Department, Federal Reserve and FDIC saying, “All Silicon Valley Bank depositors will have access to their money starting Monday.”Additionally, regulators took over Signature Bank citing systemic risk and will give people full access to their deposits.
Is the news good that the regulators are stepping in? It is clearly better than the alternative, but I am not convinced this solves the broader problems we face and am not convinced that all is well now despite the intervention. I expect additional choppiness in coming months with other shoes to drop.
I am not sure there has been another individual on the planet who has been more critical of the Fed and in my countless writings, called them out for leaving rates too low for too long. I was screaming that it was not “Transitory” as the Fed, Yellen, Biden suggested. I felt that Quantitative Easing should have ended a year prior to it ending. The Fed largely created the inflation issues we face, and then jack up rates at an unprecedented rate causing all kinds of carnage and leading to large losses. Some of the many writings on the Fed having it wrong:
I am not convinced the Fed will be able to continue with substantial rate hikes in coming months with the backdrop of the regional banking mess, consumer, and 2nd and third order impacts of the news of the past week. Companies will close, more office space will be available, tech/biotech companies will struggle to get funding, and the consumer will remain under pressure.
The equity markets are rallying on the news and the 2-year Treasury is -14bps to 4.45%. Remember, last Wednesday, it was at 5.06%. The market is putting the Fed into a corner. The market is suggesting rate cuts in 2023 now. We have gone from inflation fears to economic fears. Sorry Powell, I have not confidence in you or your team and please do not think of today’s actions as a win. It just avoided a monster loss.