20th March 2023 – What the Fed can do next to protect the US banking system

[Walid Salah Eldin]

God willing, We are ahead of next for awaited meeting of the FOMC member this week, after increasing worries about the banking sector efficiency in US, after the vcb’s collapse, assuming deposits of Signature Bridge Bank by a subsidiary of New York Community Bancorporation to prop it up and the First Republic rescue plan worth $30b by a group of 11 giant banks could not hold S&P back from downgrading it deeper into junk territory to “B-plus” from “A-minus” saying that it is still in sack of liquidity.

The worry was not about a failure of a bank, 2 or more, but the reason why we see that fallout. As vcb’s assets structure of holding a great ample of low yielding UST is not something special for it, but it’s widely in use of the investment vehicle of major banks in US and even out of it.

While they are watching rising of UST yields in the secondary money markets on the Fed’s current adopted tightening policy to contain inflation with no action, making their profitability lagged behind the yield curve of their holding of UST and in exposure to fallout short of liquidity can drive them to the money market to book losses.

While the recent inflation data from US were suggesting moving of Fed fund rate up by 50 basis point more, as what Fed’s Chief Jerome Powell has been figured out during his recent testimony to the senate banking affairs committee earlier this month, before the crisis of svb, expecting holding rates high for longer time to contain the inflation upside risks in US.

But now after these looming financial risks, the odds of watching 50 basis hiking this week diminished and the probability of holding rates unchanged increased but the most expected is still tightening by 0.25% for curbing inflation.

Surely, the new quarterly announced projections of the interest rate by FOMC’s members will be closely watched to know their will and also their evaluation of the inflation, the growth and the unemployment rate next.

Until now, The Fed is looking aware of the problem and eager to work on it with the treasury and other counterparts opening swaps window with other 5 major central banks to infuse USD liquidity.

But what can they do next;

- The FOMC can lower the interest rate to lower the pressure on the banking sector generally and to reduce the probability of watching further fallout. But that is hard to bring back the trust in the financial market and the banking sector as no sign of inflation setting back or even looming recession risks yet. While the Fed fund rate is now close to 5%, after tsunami of hiking by the Fed hit the banking sector which lived for relatively long period of holding rates it near zero.
- The Fed can show also trust in the banking the sector and economic performance and choose to tighten by another 0.25% to fight inflation and this is also respectful choice as it shows also that it is well-contained problem.
- The Fed can choose to provide relatively low yielding loans for the banking sector grunted by the banks holding of US Treasuries as a Collateral on their maturities to smooth the pressure on them. This action can support them directly to face the crisis and that is my view and it can be taken with other easing steps, if the pressure on the Fed accumulates and it can be also with the Fed’s current adopted policy to fight inflation.


Kind Regards
Global Market Strategist of FX-Recommends
Walid Salah El Din

 

[Atilla]

God willing, We are ahead of next for awaited meeting of the FOMC member this week, after increasing worries about the banking sector efficiency in US, after the vcb’s collapse, assuming deposits of Signature Bridge Bank by a subsidiary of New York Community Bancorporation to prop it up and the First Republic rescue plan worth $30b by a group of 11 giant banks could not hold S&P back from downgrading it deeper into junk territory to “B-plus” from “A-minus” saying that it is still in sack of liquidity.

The worry was not about a failure of a bank, 2 or more, but the reason why we see that fallout. As vcb’s assets structure of holding a great ample of low yielding UST is not something special for it, but it’s widely in use of the investment vehicle of major banks in US and even out of it.

While they are watching rising of UST yields in the secondary money markets on the Fed’s current adopted tightening policy to contain inflation with no action, making their profitability lagged behind the yield curve of their holding of UST and in exposure to fallout short of liquidity can drive them to the money market to book losses.

While the recent inflation data from US were suggesting moving of Fed fund rate up by 50 basis point more, as what Fed’s Chief Jerome Powell has been figured out during his recent testimony to the senate banking affairs committee earlier this month, before the crisis of svb, expecting holding rates high for longer time to contain the inflation upside risks in US.

But now after these looming financial risks, the odds of watching 50 basis hiking this week diminished and the probability of holding rates unchanged increased but the most expected is still tightening by 0.25% for curbing inflation.

Surely, the new quarterly announced projections of the interest rate by FOMC’s members will be closely watched to know their will and also their evaluation of the inflation, the growth and the unemployment rate next.

Until now, The Fed is looking aware of the problem and eager to work on it with the treasury and other counterparts opening swaps window with other 5 major central banks to infuse USD liquidity.

But what can they do next;

- The FOMC can lower the interest rate to lower the pressure on the banking sector generally and to reduce the probability of watching further fallout. But that is hard to bring back the trust in the financial market and the banking sector as no sign of inflation setting back or even looming recession risks yet. While the Fed fund rate is now close to 5%, after tsunami of hiking by the Fed hit the banking sector which lived for relatively long period of holding rates it near zero.
- The Fed can show also trust in the banking the sector and economic performance and choose to tighten by another 0.25% to fight inflation and this is also respectful choice as it shows also that it is well-contained problem.
- The Fed can choose to provide relatively low yielding loans for the banking sector grunted by the banks holding of US Treasuries as a Collateral on their maturities to smooth the pressure on them. This action can support them directly to face the crisis and that is my view and it can be taken with other easing steps, if the pressure on the Fed accumulates and it can be also with the Fed’s current adopted policy to fight inflation.


Kind Regards
Global Market Strategist of FX-Recommends
Walid Salah El Din

The Fed can't do much but give guidance and advice imo. Monetary supply side policies have reached their conclusion and expired. It is much like a two sided sword that cuts the wielder which ever way it is swung. Raise rates and you diminish banks assets comprising their liquidity. Keep rates on hold or drop them and inflation holds current levels or gathers momentum.

Administrators seem to have forgotten fiscal policies to manage demand side of the economy. Have yet to hear fiscal policies uttered by any analyst. Politicians and bankers have lost the plot.

Having said that my bet is on a 0.25% hike because it is middle of the road of sorts in the absence of any fiscal policy to tame inflation. Don't mention taxation.

 

[Walid Salah Eldin]

you know that having an impact by fiscal policy decision takes longer time.
They are focusing on the deposited grantees and the FIDC. I see that it is wasting of time and can not solve a problem can grown up like that and have very high price. The banks were not active enough to react to the interest rate decision can be enact immediately, so what about a fiscal decision. I see taking any action to solve it can expose the greenback to higher pressure.
Surely most expectation refer to 0.25% hike i mentioned that too.
anyway, I hope that the trust can return and the problem can be avoided.
Enjoy

 

[Atilla]

Beg to differ.

Impact of rates not quick fix either. At least 6 months to feed through. It's all a matter of inflationary expectations affecting expenditure and investment decisions.

Look what our chancellor done? Clever using fiscal drag by not raising tax thresholds and also he did raise corporation tax. Good moves imo.

Monetary policy has excessive attention and emphasise and indeed has become the burden key point of issue.

As the saying goes if you only have a hammer, everything becomes a nail.

Placing focus on fiscal policy will ease pressure on banks whilst deploying it on inflation. Markets will factor that in. Raising rates will compromise banks liquidity.

Moreover, lower rates will facilitate investment shortening payback return allowing production and productivity to take place, fiscal policy eases excess demand thus suppressing inflationary pressure.

Deploying FIDC is the same as acknowledging failure of a financial institution and the market will simply look at the next weakest entity as they will be slaughtered one by one by market greed.

 

[Walid Salah Eldin]

Yes they could not capitalize on the tightening as they did on easing they used to live in before that shock.
Anyway, it is good to see that they detected that tightening is also hurting the banking sector as easing was driving it to go far in meaningless investments such as game stop crisis.
let's see what to come out today from the Fed by God's will.
Have a good day.
Stay Safe and Enjoy

 

[Atilla]

https://www.reuters.com/world/uk/uk-inflation-rate-rises-104-february-ons-2023-03-22/

UK inflation unexpectedly rose and BoE decision on Thursday to follow.

We live in interesting times

 

[Atilla]

Well... after SVB and Credit Suisse, the next pig to be led up the path to the slaughter house is Deutsche Bank. Who could have guessed that?

Monetary policy and how bloody marvelous it is - turning in a blistering performance in the spotlight. The tool to control and fix market activity is actually destabilising and toppling the base of the very foundation it sits on.

There is something so fundamentally wrong with our self regulated financial system in the free capitalist world, it is indeed alarming. Has anyone noticed pure free market capitalists not calling for Government to step back and let the free markets decide? In an ideal world, shareholders should assume the loss or pay in support i.e. SVB and Credit Suisse. In contrast, shareholders run to the banks to withdraw their money. Perpetuating the very event outcome they fear.

Some youtube clip was spreading about how one individual was asked to explain why they wanted to take 1K of their money out in cash. Had to produce proof about what they were going to do with the money in our free world. Freaky scary if the video clip ever finds a home and peeps do try to test the news if it is true or not.

Lessons learned have to be to review banks' liquidity ratios and just how safe or wise it is to hold TBills in that basket.

Another lesson learned will be the next time governments try and raise funds by issuing bonds at the trough of a future recession. Markets will remember what goes down must come up again.

Not hearing much about fiscal policy? Except from this numpty Jacob Rees-Mogg. Who thinks it is the wrong policy.


I have utter contempt for most of our leaders. Useless bag of career politicians who are thick as two planks.

 

[Almarok]