Upcoming Events
Mar 13 Closed Board Meeting Under Expedited Procedures
Mar 13 Survey of Consumer Expectations Release
Mar 14 CPI Release
Mar 14 Bowman Speaks at Independent Community Bankers Association Event
Mar 15 PPI Release
Mar 15 GDPNow Update
Mar 16 GDPNow Update
Mar 17 Surveys of Consumers Release
Mar 17 Industrial Production and Capacity Utilization Release
Recent News
Don’t panic… The Federal Reserve Board of Governors announced it would hold an emergency meeting on Monday to review and determine its advance and discount rates. Fed officials likely anticipated greater than usual liquidity demand, as markets come to grips with the Silicon Valley Bank (SVB) closure and uninsured depositors at other banks attempt to withdraw funds.
Prior to its closure on Friday, SVB was the 16th largest bank in the United States.
On Sunday, the New York State Department of Financial Services closed Signature Bank, citing systemic risk. The Financial Times reports that, as of December 2022, the FDIC insured just 10 percent of the $89 billion held in bank deposits at Signature Bank.
Later on Sunday, the Fed announced it would provide liquidity through a newly-created Bank Term Funding Program (BTFP). The BTFP will offer “loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral,” which will be valued at par. The program is designed to prevent banks from suffering fire sale losses, in an effort to meet the needs of their depositors.
“The Federal Reserve is prepared to address any liquidity pressures that may arise,” the statement read.
A separate statement, issued jointly with the Treasury and the Federal Deposit Insurance Corporation (FDIC), resolved issues related to the recent bank failures:
After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
Whether these measures will be sufficient to calm markets remains to be seen.
Changing odds… The CME Group reported a 95.2 percent chance on Sunday that the Fed would raise its federal funds rate target range by 25 basis points in March. On Friday, it reported a 59.8 percent chance.
The odds of a 50 basis point hike, previously at 40.2 percent, decreased to 0.0 percent. The odds that the Fed would leave its target range unchanged, which had been 0.0 percent on Friday, increased to 4.8 percent.
Asked and answered… Fed Chair Jerome Powell testified before the House and Senate last week, as required by the Humphrey–Hawkins Act. Politicians on both sides of the aisle expressed concerns that bringing down inflation would result in higher unemployment.
Democrats argued that, since today’s inflation is largely supply-driven, continuing to raise interest rates is unwarranted. “So far, you haven’t tipped the economy into recession,” Sen. Elizabeth Warren (D-MA) told Powell, “but you haven’t brought inflation entirely under control either. And maybe the reason for that is that other things are also keeping prices high—things you can’t fix with high interest rates: things like price gouging, and supply chain kinks, and a war in Ukraine.”
There is little evidence that today’s inflation is largely driven by supply-side factors. Production contracted sharply in the first half of 2020, but has since recovered. Real Gross Domestic Product returned to its pre-pandemic level by the end of Q1-2021 and its pre-pandemic trajectory by the end of Q2-2021.
Republicans agreed that bringing down inflation was important, but thought Powell could use some help. “It’s undeniable,” Sen. John Kennedy (R-KY) told Powell, “that the only way we are going to get this sticky inflation down is to attack it on the monetary side, which you’re doing, and on the fiscal side, which means Congress has got to reduce the rate of spending and reduce the rate of growth of debt accumulation.” “The more we help on the fiscal side,” Sen. Kennedy continued, “the fewer people you’re gonna have to put out of work.”
Powell replied that, although it is “absolutely essential” to put the growth of debt on a more sustainable path, fiscal policy is not currently a big factor driving inflation.
Both Sens. Warren and Kennedy appeared to reference a recent report by Stephen Cecchetti (Brandeis International Business School), Michael Feroli (JP Morgan), Peter Hooper (Deutsche Bank), Frederic Mishkin (Columbia University), and Kermit Schoenholtz (NYU Stern) titled Managing Disinflation, which was presented at the U.S. Monetary Policy Forum in February.
Turnover … Job opening fell from 11.2 million in December to 10.8 million in January, the Bureau of Labor Statistics reported. Hires and total separations were more-or-less unchanged, but the composition of total separations changed: quits declined (-0.2 million), layoffs and discharges picked up (+0.2 million).
The situation… The economy added 311,000 non-farm payroll jobs in February. There were 5.9 million unemployed people, compared with 6.3 million one year earlier.
The unemployment rate was 3.6 percent in February, up from 3.4 percent in the prior month. The labor force participation rate was 62.5 percent—up from 62.4 percent in January—and the employment-population ratio was unchanged at 60.2 percent.