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  • Writer's picturePeter Fitzhugh

Guesswork, Almost.

What's Next is Anyone's Guess

You call it...

It’s a question of priorities – this business of the Fed finding itself raising rates for the ninth consecutive time, another quarter point this round, while using an emergency loan program to stabilize a banking system that went haywire largely because of those spiked interest rates. Or in the worlds of Avery Shenfield – chief economist at CIBC World Markets – “walk and chew gum at the same time.”

The Fed is a single focus organism; sometimes it shifts focus, but it is not great at multi-tasking. A year ago, the benchmark federal funds rate was near zero – and had been for about a decade – as of yesterday, we are at a 16 year high of 4.75% to 5%. Which is bound to play hell with the long-term Treasuries that banks hold because they are easy to sell to cover things like deposit withdrawals. The banking system started this year with some $620bn in unrealized losses on its Treasuries assets.

Thanks to Dodd-Frank, implemented after the 2008 meltdown, banks must mark these Treasuries to market, meaning, in effect that their underlying market value is on the books. Investors and depositors may not like it, but no one is entirely shocked. So, it’s a little weird that the man behind watering down the law in 2018 was Barney Frank, the former congressman and co-sponsor of the original bill. His argument was that mid-tier banks should have to mark Treasuries they intend to hold to maturity to market. With the result that those unrealized losses in banks like SVB and Signature. (of which Frank was a board member) were hiding in the books like a grenade.

And it just went boom. Mind, banking scares go both ways – spooking bankers and depositors alike. This is a problem because those mid-tier banks with less than $250bn in assets make roughly half of US commercial and industrial lending, 6o% of residential real estate lending and some 80% of commercial real estate. A credit crunch that will cut off oxygen to the economy.

Predicting the effect of this week’s shift in focus, though is tricky. Even Jay Powell, when asked about it, said that it would be: “Guesswork, almost, at this point.”

That’s true enough, but you aren’t going to hear a lot about a soft landing at the club this weekend.


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