Today's FOMC statement says that the Fed is holding its target Fed Funds rate at 5% to 5.25%. The decision was unanimous among voting members.
While today's action marks the first Federal Reserve meeting in this cycle to end without a rate increase, the Fed is now decidedly hawkish. The committee sees more inflation than it did previously with the 12 month change in core inflation well above 4% and core PCE inflation (exclude food and transportation) closer to 5.50%. It also sees a tight labor market with low unemployment that is causing outsized wage inflation.
Chairman Jay Powell's statement says that the Fed remains very concerned that inflation remains on the high side of expectations. In addition to eroding purchasing power, inflation is undermining confidence in the economy and the burdens of higher prices are falling more heavily on the working and middle classes. The Fed's dual mandate requires that it achieve not only its maximum employment goals but also its price stability goals.
A majority of the members now see at least two more quarter point hikes this year. At least a few see three hikes and one committee member favors a full 1% increase before the end of the year.
Chair Powell said that further rate decisions will continue to be made meeting by meeting. A Fed pause today gives it time for more information to come in, but also gives troubled banks more time to work through the balance sheet and avoid more failures like Silicon Valley Bank and First Republic.
The hawkish message about further rate hikes may cause analysts to question whether we are going to get a soft landing or whether a recession is still coming in late 2023.
Bottom line: Believe the Fed when they say rates will be higher for longer. Prepare for still higher interest rates. We'll see still more competitive savings rates and CD rates in the second half of the year. We may also see a more difficult mortgage environment.
It has been a difficult few days in New York as the air quality has been the worst in the world for most of the last 48 hours due to the wildfires in Quebec.
The City of course has seen tougher days, much tougher. It has also experienced climate-induced disasters before, including Superstorm Sandy in 2012 and catastrophic flooding that killed 14 across the City and left much of Central Park underwater less than 2 years ago.
Unfortunately, this event, like the last two, is not likely be the wake up call that will drive the world’s financial capital to close down its investments in fossil fuels and commit to a transition to wind and solar.
We want to believe that action will be taken in NY and DC to make the necessary investments in wind and solar so that mankind will finally act (already very late), but this is unlikely to do it. I find myself asking whether anything will change until it hits the pocketbooks of the wealthiest banking leaders. A flooding even on Dune Road in the Hamptons is more likely to result in action than a couple days of bad air quality.
I have said before that the four largest US banks – Chase, Citibank, Wells Fargo and Bank of America – need to perform stress tests in which they mark to zero the values of their fossil investments. The results of those test need to be balanced against real tests showing whether they – and the economy, writ large - can survive a massive disruptions to the functioning ecosystem. (https://www.bestcashcow.com/could-the-climate-crisis-lead-to-a-banking-crisis.html).
After accounting for the dramatic decline in the costs of wind (offshore wind and onshore wind), of photovoltaic cells and of lithium production – much of which we have seen in just the last year – it is clearer now that the transition is not just necessary, but cost-effective for those willing to fund it. A 2022 Stanford University study outlines the reality that a transition to wind, water and solar will cost $62 trillion globally, but will have a payback period of 6 years with $11 trillion in direct and indirect benefits annually. If not the current roster of major banks, then some other institutions needs to form or be former to make this investment and reap this reward.
Meanwhile, New Yorkers continue to suffer through lightheadedness from the smell of burning maple and just hope for an end to this.
I don’t agree with Senator Kennedy much. Almost everything that he has said publicly since Trump emerged has been absurdly and blindly naive. His positions on the major social issues of our time indicate he wants to wage war on the young and on women. And, he seems to get his jollies by trying to stump Biden’s judicial nominees with simple first-year law school civil procedure questions about federal diversity jurisdiction.
While mostly bluster, he did show some signs of being a real Senator yesterday. He first interrogated Greg Becker, the Silicon Valley Bank CEO, appearing to know more about his bank’s exposures than he had himself, before telling him: "Mr. Becker, you made a really stupid bet that went bad."
After Becker claimed that SVB’s demise was wholly the result of an “unprecedented” bank run driven by social media (something I suggested wasn’t the case here), Kennedy replied: "This wasn't unprecedented. …. You put all of your eggs in one basket. Unless you were living on the International Space Station, you could see interest rates were rising and you weren't hedged."
Kennedy also suggested that Becker failed to make any effort to save the bank because he had already cashed out and would have had very little himself to financial gain through a financial transaction or acquisition.
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Quite extraordinarily, Becker didn’t apologize to other banks or the government during the course of the Senate hearing. Instead, he apologized to his customers who were wholly indemnified to the detriment of the other banks and the government.
I also do not agree with Massachusetts Senator Elizabeth Warren about everything. However, I agree with her position that Becker needs to be investigated and that the government should enact laws providing for the claw back of executive compensation where there is a bank failure.
