The Fed hiked rates by 25 basis point this week. The ECB followed suit. The Bank of England is expected to join the 25 basis point club next week.
The target range for the Fed Funds rate is 5.00% to 5.25%. UK base rates will hit 4.5%, possibly 4.75%. In Europe the interest rates on the marginal lending facility are at 4.00%.
Christine Lagarde has suggested, although the rate of increase has slowed, there a more increases to follow.
In the UK markets would like to believe 4.5% will be the peak for this stage in the cycle. With more to come in Europe, 4.5% (MLF) may well also be the case in Europe.
In the USA, the doves believe we have seen the top of the curve. It seems unlikely there will be further rises in Fed rates for the moment. Jerome Powell is ruling out any cuts to base rates in the current year.
The markets are not convinced. Ten year bond yields trade at 3.4% this morning. UK ten year gilts trade at 3.75%. Manna from heaven. Markets require a softening of yields to restore value to the bond market.
“When the Fed hits the brakes, someone goes through the windscreen.”
When the Fed hits the brakes, someone goes through the windscreen, It was almost the Fed itself. A cluster of regional banks have “hit the hood” including Signature, Silicon Valley Bank and First Republic. Combined assets of $550 billion are splattered over the windscreen.
JP Morgan has mopped up some of the blood with a hefty clean up fee. Jamie Dimon is convinced ”We are past the worst”. Traders continue to torment Pac West and Western Alliance. Pac West is weighing its options. Shares fell despite assertions by the Federal Reserve, the recent bank crisis is contained.
First Republic collapsed despite a $30 billion lifeline from fellow bankers. $100 billion of deposits were withdrawn in one day. The Fed maintain the US banking system is sound and resilient. Yet banks “faced with unrealized losses face significant safety and soundness risks”. The fear is the deficit exposure will spread from bonds to the commercial property sector.
At the Fed briefing on the 14th February, one page was devoted to Silicon Valley Bank.
At the Fed briefing on the 14th February, one page was devoted to Silicon Valley Bank. There was nothing about the risk of a bank run. The situation was not presented as urgent or alarming. Less than four weeks late SVB collapsed.
The Fed’s own Barr review pointed the finger inside the regulator. There was a clear need to “address rules of engagement and supervisory conditions”.
At the end of 2021, no one including the Fed expected rates to rise in 2022. Regulators were testing the implications of a further fall in rates and interest spreads.
Stress tests for life after Planet ZIRP and a rapid rise in base rates were off the agenda. By the beginning of 2023, the staff report stated, “SVB has significant interest rates risk, the risk measurement process has failed within the bank.”
Maybe they should have been following the Saturday Economist! Much more on this to follow ...
That's all for now. Have a Great Bank Holiday weekend,
The Silicon Valley Bank Case Study
Friday Forward Guidance
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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