The Ripple Effect: How the Federal Reserve's Decisions Shape Economic and Credit Growth

FOMC Meta Analysis.

Here is what we will be getting into today:

1. The Fed's Challenge of Balancing Economic Growth and Tightening Credit.

2. Modest Growth, High Inflation: The Federal Reserve's Recent Statement.

3. The Structural Problem with the Federal Reserve System As Bank Regulator.

4. Rising Tracker Mortgages: How the Credit Crunch is Impacting Borrowers.
   

Let's Dive In!

Website: Financial Times

Title: Close to thin ice: looming credit crunch puts pressure on Fed
Link: https://www.ft.com/content/92c46ac5-6e67-4620-8798-b95a5a2fba72

Here are the key highlights:

• Economists are concerned following the recent interest rate hike by the US Federal Reserve, as the Fed now faces the challenge of striking a balance between economic growth and preventing a credit crunch. The economy is gaining momentum, but the collapse of two major lenders and government intervention have stressed the banking industry, necessitating cautious measures from the Fed and other entities.

• The Federal Open Market Committee (FOMC) warns that ongoing turmoil could lead to tighter credit conditions, potentially resulting in higher inflation and reduced economic activity. The FOMC projects the Federal Reserve funds rate to peak at 5-5.25% this year, with indications that the rate-hiking campaign may be nearing its end. The Fed has slightly downgraded its economic outlook, expecting 0.4% growth this year and 1.2% in 2024. This poses a challenge for President Joe Biden, who plans to run for re-election next year.

• The unemployment rate is predicted to peak at 4.6% in 2024, while core inflation is expected to fall back to 2.6%, still above target. Although Fed Chair Powell maintains that a soft landing is possible, he admits that the path has narrowed due to recent events. The odds of a recession are estimated at 35%, increasing to over 60% in case of a broader financial shock.

• The Fed's failure to prevent the collapses of Silicon Valley Bank and Signature Bank has led to new legislation proposing the replacement of the central bank's internal investigator with a presidential appointee. This bipartisan effort, supported by Republican Rick Scott and Democrat Elizabeth Warren, aims to ensure stability in the banking system.
  

Newsletter: Macro Visor

Title: Yesterday's Fed decision in plain English.
Link: https://www.macrovisor.com/p/yesterdays-fed-decision-in-plain

Here are the key highlights:

• The Federal Reserve's recent statement highlights a period of modest growth in spending and production, with increasing job gains and low unemployment rates. However, inflation remains high according to their analysis. While the US banking system is sound, recent developments may result in tighter credit conditions moving forward which could potentially impact economic activity, hiring, and inflation.

• It is important to note that Federal Funds Rate Chair, Powell, clarified that the Bank Term Funding Program was intended to help liquidity for banks with safe, liquid assets and is not meant to be viewed as a stimulus program. Any additional policy firming will be closely monitored for implications on monetary policy.

• The Federal Reserve's decision to raise interest rates has been met with some skepticism, particularly in light of recent events with bank lending. The Fed has remained committed to its goal of fighting inflation while also showing sensitivity to the banking situation. The FOMC has shown their commitment to returning inflation to 2%, which may provide stability for the market and the broader economy. While investors may adjust their expectations in the short term to react to this, in the long run, the tightening of monetary policy may result in lower economic growth that will adversely affect stock prices.

Website: Wolf Street

Title: The Fed Should Be Fired as Bank Regulator. Powells Discussion of Silicon Valley Bank & Regulatory Failure Shows Why
Link: https://wolfstreet.com/2023/03/24/powell-discussion-of-silicon-valley-bank-regulatory-failure-shows-why-the-fed-should-be-fired-as-bank-regulator/

Here are the key highlights:

• The collapse of Silicon Valley Bank laid bare the ineptness and conflicting nature of the Federal Reserve as a banking regulator. The structural problem with the Federal Reserve System is that the regional Federal Reserve Banks are governed by the CEOs of the banks in their districts, whose primary objective is their own wealth, not effective regulation that could cut into their own wealth.

• Silicon Valley Bank's management failed badly by growing the bank to quickly. This exposed the bank to significant liquidity and interest rate risks, but SVB failed to hedge that risk. This failed regulation over banks exposes a significant risk in the Federal Reserve System.

• The regulatory setup cannot be fixed with investigations as the Fed, as a bank regulator and supervisor, is structurally conflicted and ineffective. Congress should restructure banking supervision, with the FDIC given full regulatory and supervisory power and some real teeth. The FDIC has prioritized minimizing losses to the deposit insurance fund, and effective supervision in preventing bank failures aligns with this goal. Unlike the Fed, the FDIC is not structurally conflicted.

Website: Financial Times

Title: Yikes! What should I do with my mortgage?
Link: https://www.ft.com/content/a5d8f83f-8304-48b6-9888-24145c4d3a66

Here are the key highlights:

• Central banks around the world have been fiercely debating the direction of interest rates and whether those of fixed-rate mortgages may be doing the same with even more passion. Inflation is still raging, especially in the UK where grocery bills may rival mortgage payments. There are fears that the banking crisis could tip the US and other economies into recession, which has already caused swap rates to dip.

• Longer-term rates for landlords have also shown improvement, but this interest rate cycle is already beginning to break. The possibility of a credit crunch has made lenders chase after borrowers with good incomes and equity in their homes. Some people believe that this could bring about interest rates as low as 3.5% on a five-year fix by the end of 2023.

• Wealthier clients who can afford to take risks are more likely to opt for tracker mortgages. Tracker mortgages have the advantage of flexibility, as they rarely carry early repayment charges. This means that if interest rates drop or the market moves against you, you can remortgage to a fix at any time without being penalized. According to reports, one in five clients of lenders like L&C Mortgages are using tracker mortgages. At the time of writing, Chorley Building Society is offering a discounted variable rate of 3.8%, while Barclays is offering a two-year tracker at 4.39% for Premier customers.

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