5/5/23 – The Federal Reserve is like a Goldfish – it has a 10 Second Memory
Ted Lasso encourages his players to “Be a Goldfish” because the animal only has a 10 second memory. We think the Federal Reserve is taking this advice literally.
The most consequential story of the week came out on Tuesday, the day before the FOMC announcement. The Treasury Buyers Advisory Committee (TBAC) released the minutes of their quarterly meeting with the Treasury Department. The TBAC is a high-level group of money center banks and Treasury bond buyers that meets with Treasury officials quarterly to discuss operations of the Treasury bond market. The Treasury asked the TBAC what the tolerance would be for Treasury buying back bonds in the open market. We were floored! The current environment in which we find ourselves can be laid entirely at the foot of the Federal Reserve and the irresponsible monetary policy it has pursued. That they are even considering resuming market manipulation is unspeakable. Our suspicion is that the Treasury and the Fed realize that they don’t want to take interest rates back to zero again but need a plan on how to stimulate the economy when it slips into a recession, which could come as early as later this year. Of course, the TBAC gang, salivating over the potential for even greater trading profits, wholeheartedly welcomed the plan. At this time, the buy-back plan is only an idea, but we anticipate that it’s an idea that will come to pass, maybe as soon as later this year.
Aside from the TBAC minutes there was plenty to lift volatility this week. As we wrote last Friday, we doubted that First Republic Bank would last the weekend and it was no surprise that J.P. Morgan rode to the rescue and bought the troubled bank. On Monday Treasury Secretary Yellen publicly announced that the U.S. banking system is “sound” in an attempt to calm nervous fears that the fate of First Republic is not going to prove contagious.
The Fed, as was widely expected, raised the overnight interest rate by 25 basis points and the accompanying statement was worded to sound neutral, not too hawkish, not too dovish. At his post-FOMC press conference Chairman Powell reiterated Yellen’s assurance that the U.S. banking system is “sound.” The press conference started out as the usual softball fest of Q&A, until CNBC Senior Correspondent, Steve Liesmann, asked Powell about his response when he was informed in February that Silicon Valley Bank and several other banks were sitting with hold-to-maturity portfolios that were substantially in the red. Powell responded “It wasn’t — it wasn’t presented as an urgent or alarming situation. It was presented as an informational non-decisional kind of a thing.” Liesmann responded “I’m sorry. I don’t mean to be argumentative, but the staff report said SVB has significant interest rate risk. It said interest rate risk measurements failed at SVB, and it said, Banks with large unrealized losses face significant safety and soundness risks. Why was that not alarming?” Powell’s response was basically what has become known as word salad – a response that neither answers the question nor makes much sense. The Chairman was clearly frazzled and quickly moved on to other questions, mostly focusing on if and when another rate hike would be engineered and mostly reiterating that the U.S. banking system is “sound”. Judging by the performance of the regional bank ETF, down over 40% since March 1st, investors aren’t buying it!
Finally, to the employment report. Usually, the most watched economic data point of the month, but almost an afterthought during a week such as this. Economists had been forecasting a deceleration in hiring from the 236,000 jobs gained last month to 185,000 this month. Instead, the economy added 253,000 new jobs and the unemployment rate fell to 3.4%, matching the all-time low reached in January of this year. However, that 236,000 registered last month was revised to a gain of 165,000, essentially a push for the two months. The takeaway is that despite the Fed’s attempt to slow the economy, there remains a worker shortage and job growth remains healthy.
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