Will the Fed Hike A Tenth Time In A Row?
The heated pace of rate hikes may soon be nearing an end, but possibly not before the Fed pushes the U.S. economy to the brink.
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The U.S. Federal Reserve has made it patently clear it is so eager to break the back of the worst inflation in four decades that it is willing to push the nation’s economy into a recession and, if necessary, risk the stability of the entire financial system.
In the past, the big question was, “How far is the Fed willing to go?” But that’s not in question anymore.
While inflation growth has eased, it’s remained doggedly sticky. Consumer prices were up 5 percent in March, according to the latest U.S. Bureau of Labor Statistics data. That’s down from 6 percent in February, marking the ninth straight month of cooling growth on an annual basis, and well off the high of 9 percent last June. But it is still above the Fed’s 2 percent target.
The last time the Fed hiked interest rates in March, a procession of banks had already begun crumbling: Silicon Valley Bank (purchased by First-Citizens Bank); Signature Bank (now Flagstar Bank after a large chunk of its assets were bought by New York Community Bank); Switzerland’s Credit Suisse (forced into a merger with UBS); and First Republic (which wobbled precariously throughout the spring until it was taken over by the Federal Deposit Insurance Corporation on Monday, then acquired by JPMorgan).
Lest anyone forget, it was just days ago that JPMorgan’s chief executive Jamie Dimon helped lead the monumental effort to persuade Wall Street CEOs to contribute $30 billion to rescue San Francisco-based First Republic, which was losing tens of billions of deposits in a bank run that had already toppled Silicon Valley Bank and Signature Bank, and would result in what UBS would call the “herculean” takeover of Credit Suisse.
In other words, the carnage has been immense – and may still intensify before it gets better. Regional banks remained shaky this week, with Goldman Sachs estimating that smaller lenders (defined as banks with less than $250 billion in assets) represent around 80 percent of total commercial real estate mortgages and nearly half of all consumer lending. They also account for 50 percent of commercial and industrial lending and 60 percent of residential real estate lending in the U.S.
“As stress ripples through smaller banks in the U.S., the tightening in lending standards among those institutions is expected to reduce economic growth this year,” Goldman noted – and that was before the Fed’s last rate hike and the fallout of the days afterward.
Yet the Fed is widely expected to raise interest rates another 25 basis points today to between 5 percent and 5.25 percent. At its last meeting in March, the Fed’s hike represented the highest interest rates in 16 years, pushing borrowing costs higher and sidestepping calls for the central bank to pause and allow more time to shore up destabilized banks.
At the time, the Fed noted it was targeting a year-end federal funds rate of 5.1 percent, intimating it would hike again before the year was out. But it did not issue its now mantra-like prediction that more rate hikes “will be appropriate,” signaling the furious pace of rate hikes may be coming to an end.
During the press conference that followed, Fed chairman Jerome Powell downplayed what he called “serious difficulties at a small number of banks” with “unusual funding needs” and “isolated banking problems.” He assured the public that the “banking system is sound and resilient with strong capital and liquidity” and that the Fed was “committed to learning the lessons from this episode and to work to prevent events like this from happening again.”
After his bank’s dramatic purchase of the latest weakest-link bank, First Republic, Dimon told analysts during a conference call this week that “this part of the crisis is over.” JPMorgan’s acquisition of First Republic is expected to increase its profit by a handy $500 million a year and deliver a new slate of deep-pocketed clientele to the bank.
Cocktail chatter at the Milken Institute Global Conference in Beverly Hills this week was not so upbeat. As the JPMorgan-First Republic deal closed, David Hunt, president and chief executive of global asset manager PGIM, remarked, “There’s a little bit of a tendency to breathe a sigh of relief on mornings like this and I think we got through that.” But he believes the crisis may be “just starting.”
Other market observers noted that bank customers and short sellers appear to be leaping from one “weakest bank” to the next, pulling deposits and betting those banks will also fail, which is creating a vicious cycle of downward pressure.
In the run-up to the Fed’s decision, U.S. regional bank shares crashed and trading in California’s PacWest Bancorp, seen as the latest weakest-link bank, was halted amid volatility Tuesday as its stock price cratered. Arizona’s Western Alliance Bank shares also fell, along with the SPDR S&P Regional Banking ETF. Regional bank shares have now fallen around 80 percent since March 1.
It is hard to believe it was only in the first quarter of 2022 that the Fed was keeping the federal funds rate near zero and buying billions of dollars of bonds to keep the economy humming, even as some measures of inflation showed 40-year highs. Some have criticized the Fed for springing into action too late and too aggressively, feeding the current cycle of whiplash to the economy.
While the health of the broader banking system will be top of mind for Fed governors weighing their next move on interest rate policy, it remains to be seen which lessons have been learned – and which haven’t.
The views expressed in this op-ed are solely those of the author and do not necessarily reflect the opinions or policies of The Daily Upside, its editors, or any affiliated entities. Any information provided herein is for informational purposes only and should not be construed as professional advice. Readers are encouraged to seek independent advice or conduct their own research to form their own opinions.