Market Briefing: Yellen in a Crowded Theatre
The Federal Reserve delivered another quarter-point hike at yesterday’s meeting, noting that “some additional policy firming may be appropriate," while removing a phrase about the need for "ongoing increases" that appeared in the last eight statements. In the press conference, Chair Jerome Powell noted that officials had considered pausing hikes, saying “events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes. It’s too soon to determine the extent of these effects and too soon to tell how monetary policy should respond”. He suggested that a rate cut this year was not a "baseline expectation”, pointing to “dot plot” projections that show officials holding rates well into 2024.
But markets plummeted when Treasury Secretary Janet Yellen, during a contemporaneous Senate hearing, said “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits”. If a bank failure “is deemed to create systemic risk, which I think of as the risk of a contagious bank run, we are likely to invoke the systemic risk exception, which permits the FDIC (Federal Deposit Insurance Corporation) to protect all depositors, and that would be a case-by-case determination”. This prompted a Twitter response from hedge fund manager Bill Ackman, who said “We have gone from implicit support for depositors to @SecYellen explicit statement today that no guarantee is being considered with rates now being raised to 5%. 5% is a threshold that makes bank deposits that much less attractive. I would be surprised if deposit outflows don’t accelerate effective immediately. A temporary systemwide deposit guarantee is needed to stop the bleeding”.
This reaction seems irrational. Legal experts and scholars agree: under current law, regulators are required to seek Congressional approval and presidential assent before increasing insurance on deposits. Yellen’s words amount to a statement of fact - and by suggesting that the systemic risk exception would be used to backstop troubled banks, she (arguably) also provided implicit support to depositors.
But today‘s markets are hardly rational. Meme-driven moves are increasing in scale and frequency, with Silicon Valley Bank the most recent example of a dynamic that has seen a long list of products experience extreme price volatility on rumours of supply interruptions, imaginary internet money explode into a major asset class before fading into irrelevance, and worthless companies soar in value before collapsing.
It’s only a matter of time before a similar situation unfolds in currency markets, where the value of entire countries is at stake.
The pound is climbing after the Bank of England paired a quarter-percent rate hike with some relatively hawkish forward guidance, confounding market expectations for a more cautious approach. After yesterday’s data showing an acceleration in price pressures, seven of nine voters on the Monetary Policy Committee (MPC) supported the increase and no staff members joined the dissent. Officials still expect inflation to fade in coming months, and see the economy performing better than previously forecast. According to the statement, “The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”.
Today’s economic calendar is packed with mid-tier releases. Initial claims for jobless benefits fell to 191,000 in the week ended March 18, down slightly from 192,000 in the prior week. US new home sales are seen slowing to 650,000 in February from 670,000 in the previous month. And Janet Yellen will testify in front of a House panel at 3:00, potentially adding further nuance to yesterday’s comments.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
@KARL_SCHAMOTTA
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