Barrons13 Mar 2023 10:58
SVB Is Testing Financial Stability. What It Means for the Fed.
The collapse of Silicon Valley Bank has investors the world over wondering whether history repeats itself or merely rhymes.
The Federal Reserve is trying to convince us that this time, it’s different. The 2008-09 financial crisis and the current situation were both triggered by rising interest rates. While it may have taken a few bank failures to spur regulators into action, Fed Chairman Jerome Powell is doing a lot to ensure the problems at Silvergate, SVB, and Signature Bank are contained, as Ben Bernanke once hoped about subprime.
The question is what it means for future rate hikes. It’s painfully clear that inflation is still too hot for the Fed. More price data are due this week, with CPI out Tuesday.
CME’s FedWatch Tool shows traders now see an 83% chance of a quarter-point increase at the March 22 meeting. Odds of a half-point move plunged from 40% last week to zero.
Goldman Sachs sees the Fed taking a pause. It makes sense—it would give markets a chance to catch their breath and show that the central bank is sensitive to signs of a crisis.
But there’s also a strong case to make that half-point move. The Fed’s new Bank Term Funding Program (BTFP), which allows banks to borrow unlimited amounts against a range of securities at par, is a game changer that arguably removes the risks to financial stability.
It means the Fed will lend the face value of a bond to make sure banks have enough cash on their books. No more doom loops from selling assets if depositors flee. If SVB had access to the BTFP, it might still be in business.
In any case, it’s clear the Fed sees the need for rates to go still higher, either sooner or later. When they do, watch out for more stuff breaking.
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