The Federal Reserve has comprehensively dealt with the SVB fallout over the weekend. Led by ex-Federal Reserve chair after the financial crisis, Janet Yellen, the comprehensive set of measures has helped to ensure that doubts over systemic issues in the US banking system have been put to bed. With a speedy response to the crisis delivered, the Fed can get back to its day job of raising interest rates to deal with inflation.
Not so fast.
The markets worry and today that worry has pushed risk assets (such as non-government bonds and equities) lower in price. There remain lingering concerns, not so much around systemic banking issues, but rather which other entities have business models which are unsuited to the step change in interest rates?
Over the past six months there have been a number of high profile examples and, allowing for a broader interpretation of ‘business model’, would include: FTX crytpo exchange, Liz Truss’s government, concerns about the real estate investment trust sector (witness Blackstone’s real estate issues and the gating of REITS) and a secured default in Finland. And now SVB and its smaller brethren, Signature Bank.
With Fed Funds at 4.75%, a reduction of the Fed’s balance sheet at c.$60 billion a month, liquidity is becoming more important and risk markets are worried. In the aftermath of the SVB bailout, interest rate markets have rallied with the initial belief that this mini-crisis will delay rate rises, or possibly even stop them.
Friday’s US employment numbers do not support that view and the comprehensive nature of the bailout (all of SVB’s deposits guaranteed and generous lending facilities for other banks) is aimed at putting a line under this crisis. Nonetheless, markets are right to consider the timing of a rates trajectory that had become more bearish over the past month.
The Fed will want to consider very carefully its stance. A more dovish outlook might raise concerns that there are other problems in the system, whereas a continued hawkish stance will hasten problems in the system. It seems that the Fed’s weekend bailout is emphatic, but higher interest rates are not a friend of the weak with ‘wrong’ business models. Expect other companies to emerge from that struggle with higher rates, but don’t expect inflation-fighting central banks to be blown off course – at least not for now.
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