Fed Hawks Run Into Financial Wall
Equities suffered the worst losses in more than 6 months as the Fed’s game of double-speak turned costly.
Normally, there is not much to report on over the weekend and we are simply recapping what happened last week. But the past two days have proven to be the exception. After hawkish language from Fed Chairman Powell and an ill-timed release of the Biden administration’s new budget that calls for higher taxes, markets dipped on Friday when it was learned that the California banking agency seized control of Silicon Valley Bank ($200+ billion) as depositors had run on bank assets. Over the weekend, it was unsure whether or not the Treasury or Federal Reserve would step in. As was announced Sunday evening, the Fed has unveiled the “Bank Term Funding Program (BFTP) which will offer short-term loans to banks, savings associations, and credit unions to satisfy liquidity needs. All depositors of Silicon Valley Bank (and, Signature Bank) will have full access to their funds on Monday (March 13th). This is likely to shift the focus in the short-term from further Fed rate hikes and economic releases to liquidity and orderly functioning of the financial system.
While markets wait to see if the Federal Reserve and the Treasury have curtailed any contagion, there will be plenty of economic data to digest this week.
First, the move by the Fed has caused Implied Fed Funds to shift dramatically. Just a few short days ago, there was a greater probability of a 50 basis point rate hike versus only 25 bps. That shifted to even as of Friday. On Sunday, with the Treasury/Fed's bold move, there is now a 95% probability of only a 25 bps rate hike (there's now also a 5% probability of no rate hike at the March 22nd meeting). The year-over-year numbers for inflation (CPI & PPI) will be released Tuesday & Wednesday and are expected to drop again for February. This would mark the 8th consecutive month of declines and would further bolster markets given the government's support of the financial system. No one can predict whether financial contagion will occur. Given the unique profile of Silicon Valley Bank's profile and balance sheet, it's likely the Fed's move will strengthen markets (at least overnight futures are pointing to as much).
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