|
After waiting too long to raise rates, the nation's central bank has been trying to rebuild its reputation by aggressively increasing interest rates to not only stem the rise of inflation but to bring inflation down. Just when progress seemed to be happening, albeit slowly, and the Federal Reserve has become more vigilant in its mandate, the second and third biggest bank failures in history may force them to stop. The central bank is now faced with the decision to continue fighting inflation or calm financial markets. Granted, one could argue the failure of Silicon Valley Bank was due to the Fed-orchestrated 450 basis point rate increase in less than a year, so a stop or pause is warranted.
On the other hand, the real cause of the bank failure had more to do with mismanagement. The bank’s management failed to keep adequate liquidity balances to accommodate the cash needs of its customers. There is a good reason deposits should not be funded with long-term assets. A portion of any financial institution’s portfolio needs to remain liquid to accommodate customers’ needs. Extending duration to increase earnings to make shareholders happy is the wrong approach when running a financial institution. Keeping deposits safe is the purpose. Just another reason that sets credit unions apart from banks.
There is a strong debate going on about what the Fed should do next week. Raising rates, even if just by 25 basis points, would continue to show the committee’s resolve to fight inflation, while sending a message of confidence in the banking sector, much like the European Central Bank (ECB) did this week by raising its key interest rates by 50 basis points. On the other hand, some economists argue the recent bank crisis may be having the same effect as another 25-basis-point move for slowing economic growth. So why not take a breather? Pausing this month could also send the message the Fed is either giving up its aggressive fight against inflation or there are deeper problems in the financial system. No doubt the upcoming FOMC meeting will be pivotal and market-moving, no matter what the decision is.
Key Indicators this Week
Inflation – Inflation is cooling but still hot. The February consumer price index (CPI) posted the biggest monthly increase in five months–0.4% and 0.5% for headline and core rates, respectively. On a year-over-year basis, however, inflation rose at the smallest pace since late 2021–6.0% and 5.5% for headline and core. Shelter costs continue to be one of the biggest contributors to the stickiness of inflation, rising 0.8% in February and accounting for 70% of the index. The other troubling sector is service prices, which rose the most in five months. Recreational services alone, which include streaming services and concert tickets, increased the most in almost three years. The key non-discretionary inputs in the index, food and gasoline, increased at a slower pace in February.
Retail Sales – It is getting difficult to find a trend in consumer spending. The past three months have been a rollercoaster, down 0.8% in December, up 3.2% in January and down 0.4% in February. Eight of the 13 major categories fell in sales from the prior month, led by department and furniture stores. Auto sales were down 1.8%. The only service sector in the index, restaurants and bars, posted the largest decline in the index, falling 2.2%. This is the biggest drop in over a year. The service sector has been propping up the economy to date. The question now is if this is a sign of weakness or simply weather-related.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
|