Fed Policy Measures
March 28, 2023
FCNA’s acquisition of SIVB assets and deposits has helped near-term risk sentiment, but markets are still looking for additional policy measures from the Fed, FDIC and Treasury. Incremental measures to shore up bank deposits may temporarily calm markets as the Fed continues its fight against inflation with more rate hikes and ongoing QT operations. Unfortunately, this type of scenario would only exacerbate curve inversion at a time when funding markets remain largely inactive and lending standards are set to tighten. The events from 2008 and 2020 suggest that something else may need to break before the Fed decides to ease monetary policy, which is the only long term remedy for current bank issues. The Fed was behind the curve on deciding when to tighten and it’s reasonable to assume it will be behind the curve on deciding when to pivot.
Throughout this tightening cycle, Powell has delivered on what he’s said and last week he said the Fed’s not cutting rates this year. The Fed’s recent Summary of Economic Predictions points to no rate cuts in 2023, while the market remains priced for at least 50bp of cuts into year-end. The market is pricing for something else to break, while the Fed is basing policy decisions on lagging CPI data. To make matters simple, the Fed has ended past tightening cycles when the ‘real Fed Funds rate’ turns positive. February YoY headline CPI was running at +6% and a 5% current Fed funds rate has the Fed assuming a -1% real rate. Using this logic, the March headline CPI report on April 12 will need to print near 5% to avoid another hike at the May 3 meeting. That’s a decent bet given the recent decline in commodity prices. We see headline CPI falling below 4.5% in June and below 3.5% in July.