Yves here. Sadly, your humble blogger had a sense of the Fed’s priorities when it engaged in a stealthy bailout of nearly all uninsured deposits: that the Fed had decided it was going to make damned well sure to protect the banks so it could continue with its program of hurting workers via increasing unemployment. And remember, as we’ve stressed, this inflation is not the result of too much demand but supply issues plus corporate price gouging, so the Fed is also engaged in economic malpractice in remaining determined to keep tightening the interest rate choke chain.
These bailouts are disastrously bad. They greatly increase overall support for financiers, allowing them to behave even more recklessly on the public dime. And note the central bank has breathed nary a word at to what if any constraints will be imposed, meaning they won’t bother until Congresscritters make enough of a stink.
In addition, the subsidies are biggest at the banks that demonstrated they were lousy at risk management, so the scheme is rewarding failure. The discount window changes allow banks to pledge Treasury and agency securities at the face amount. It’s called a discount window because normally the securities the bank pledge are discounted. Any bonds bought when interest rates were lower are sure to have a current value of less than 100%. And the banks that screwed up the worst will get the biggest upticks versus market value when they go to the (un)discount window.
Mind you, the official intervention was a very aggressive response, despite the deer in the headlight act, since the regulators didn’t want to admit they’d just made a nearly complete backstop of formerly uninsured deposits. Another aggressive response, that of announcing a pause on rate hikes and modes cut until banks had reoriented their affairs to handle them better, would have been a far more direct and fitting remedy to the problem, that the central bank had raised rates too far too fast. But now that the Fed has convinced itself it can continue on its labor-strangling course, it will.
By Jessica Corbett. Originally published at Common Dreams
Progressive economists and other experts blasted Federal Reserve leadership on Wednesday for raising interest rates yet again despite concerns about recent bank failures and how the quarter-point increase will impact the U.S. and global economies.
“Once again, interest rate hikes are going to fall hardest on low-wage workers and the poor—the same people who have already been hurt the most by rising prices,” tweeted University of California, Berkeley professor and former Labor Secretary Robert Reich. “Higher rates could also imperil more banks, and risk even more financial chaos. The Fed is playing with fire.”
Fed Chair Jerome Powell told reporters Wednesday that although the Federal Open Market Committee “did consider” a pause on rate increases following the Silicon Valley Bank (SVB) and Signature Bank failures, officials ultimately decided to raise the federal funds rate to a range of 4.75-5%, the highest level since 2007.
“The Fed under Chair Powell made a mistake not pausing its extreme interest rate hikes,” declared Sen. Elizabeth Warren (D-Mass.) a fierce critic of nine consecutive rate hikes since last March as well as the Fed’sregulatory rollbacks that proceeded the bank collapses.
“I’ve warned for months that the Fed’s current path risks throwing millions of Americans out of work. We have many tools to fight inflation without pushing the economy off a cliff,” added Warren, who has repeatedly called for ousting Powell.
Raising interest rates even further could weaken the strong labor market—and that was all before #SVB failed. The Fed’s continued rate hikes are bad for workers, families, and the economy. https://t.co/LuxCd2yO1N https://t.co/CwCxNQEcD9
— Economic Policy Institute (@EconomicPolicy) March 22, 2023
Patriotic Millionaires chair Morris Pearl—a bank bailout expert and former managing director at BlackRock—similarly contended that “the Fed’s decision to keep pushing forward with rate hikes no matter the circumstances is a dangerous mistake.”
Describing such hikes as “a blunt instrument,” he stressed that high interest rates “are not well suited to the economic realities the country now faces—and will inevitably end up doing more harm than good.”
Pearl continued:
In our modern economy, high interest rates are simply not an effective way to fight inflation. Rate hikes have disproportionately hurt just a few sectors, like housing, automobiles, and some banks and investors, while leaving many of the nation’s largest employers relatively unscathed.
Rising interest rates do nothing to address a major cause of inflation, corporate price gouging, and actually make another long-term cause, lack of investment in new housing, worse. Instead, the Fed is betting that lowering employment and cooling wage growth is the best solution to inflation.
Higher interest rates may be a cure for inflation, but if they end up causing another banking crisis, or pushing the economy into a recession, the cure may be worse than the disease.
An analysis released Wednesday by Accountable.US explained that “SVB’s failure was partly due partly to a ‘plunge’ in bond value and $1.8 billion in ‘paper losses’ amid the Fed’s rate hikes. By the end of 2022, the Federal Deposit Insurance Corporation (FDIC) had warned that U.S. banks were ‘sitting on $620 billion in unrealized losses’ that may make their balance sheets appear healthier than they really are.”
The watchdog group found that “at the end of 2022, the five biggest U.S. banks—JPMorgan Chase, Bank Of America, Citigroup, Wells Fargo, and U.S. Bank—reported a total of $233 billion in unrealized losses on held-to-maturity securities, including $54 billion in unrealized losses on Treasury securities. These same banks reported a combined $39.4 billion in unrealized losses on available-for-sale securities, including $12.7 billion in losses on available-for-sale U.S. Treasuries.”
Liz Zelnick, director of economic security and corporate power at Accountable.US, warned Wednesday that “hiking interest rates, even if more slowly, will devastate Main Street and Wall Street alike by wiping out millions of jobs while sending Treasury securities into a downward spiral,” acknowledging that the recent bank turmoil prevented an even bigger increase than 25 basis points.
“A recession and broken financial system are not worth the price of higher interest rates that have failed miserably to curb the corporate greed epidemic helping to drive up costs,” Zelnick added. “To date, the Federal Reserve and Chairman Jerome Powell have been more than willing to let average American families bear the brunt of their job-killing strategy—but are they also willing to let their banker friends on Wall Street go down with the ship?”
The Hill highlighted that ahead of Wednesday’s announcement, influential figures such as economist Paul Krugman and analysts for Goldman Sachs—in a Monday letter to investors—had advocated for pausing rate hikes.
“Bank stress calls for a pause,” wrote Goldman Sachs analysts. “Banking is not just another sector of the economy because financial intermediation is vital to every sector. As a result, addressing stress in the banking system is the most immediate concern and must take priority over other less urgent goals for the moment. We expect that policymakers and staff economists at the Fed will have the same view.”
It shouldn't take a lot of courage to resist another interest rate hike when the economy is this fragile.
We're incredibly disappointed in the @federalreserve's latest decision to increase rates by 25 bps.https://t.co/BOd5O73O3V pic.twitter.com/Qn4petesKw
— CEPR (@ceprdc) March 22, 2023
During his Wednesday press conference, Powell insisted that “our banking system is sound and resilient with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound.”
While Powell also emphasized the Fed’s commitment to learning from the recent SVB and Signature failures to prevent repeat events, both the bank collapses and a year of rate hikes have fueled calls for his ouster.
Asked by CNN‘s Jake Tapper on Wednesday whether she had ever directly told President Joe Biden that he should fire Powell, Warren said she wouldn’t talk about private conversations “but what I will say is I’ve made it very clear as publicly as humanly possible that I didn’t think that he should be reconfirmed as chair of the Fed. And I think he’s doing a really terrible job.”
“And he’s doing a terrible job on both fronts,” she said, referring to the Fed’s dual mandate. In terms of oversight, Powell “has spent five years weakening regulations over these multibillion-dollar banks,” and on monetary policy, he is “risking pushing our economy into a recession.”
“What he’s trying to do is get two million people laid off, and one of the things that we need to understand: He wants to raise the unemployment rate by more than a point within a single 12-month period. We have done that before in this country. In fact, we have done it 12 times before. And out of all 12 times, how many times has it resulted in a recession?” she said. “The answer is 12.”
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captain obvious here but methinks even the plebes in flyover country are catching onto this game.
Trump is already a shoe-in regardless of whether he’s behind bars.
Powell is channeling Tyler Durden. Instead of fights going on as necessary, rate hikes will continue. The Federal Reserve may achieve their targeted inflation but it will likely take consumer spending with it. I just don’t know these people traveling on busy airlines and staying at hotels that can jack their prices up (to be fair I might know one but that person is not wrapped in a bubble when it comes to markets).
I mean the average citizen in the USA can tap out the plastic, elastic credit I do suppose. By the bye, for yield mavens the downward sloping UST yield curve says a lot about how this might well end. Shorter maturity UST yields, in particular, 2 year term and shorter.
One proposal. Joe Biden could finally send us all that $600!
With inflation* that $600 is now $690.
*BLS CPI calculator
Perhaps there are other reasons they continue raising rates: they might actually believe the system is not strong at all and that they need some room to drop rates when the real crisis hits. Has the Fed ever raised rates this much in one year before?
>they need some room to drop rates when the real crisis hits.
That’s probably correct, however, that horse is already out of the barn and two states over… so to speak. The Fed’s job should be to proactively act. They should have started slowly–very slowly–raising rates a year before they did. Retroactively acting like a drunk driver swerving all over the road at the site of a pothole only makes the situation much worse
They should have started slowly–very slowly–raising rates a year before they did.
At least ten years before they did…and the rent would not be so ridiculously high, there would have been fewer anti competitive mergers, and the rich would still have been richer than everyone else but without the “sectoral imbalance” between them and the rest.
Indeed. Rates needed to go up, but not like this.
I really don’t see how they can keep this up without cratering the housing values of a substantial fraction of homeowners, putting a lot of them underwater, although the banks will now be able to rake in more in interest payments. The overall price of a home for buyers stays about the same and still way too high, but the seller gets less and the banks pick up the difference. So perhaps everything is going according to plan after all.
Thank you, Yves.
As you can imagine, it’s not just in the US. This morning, on the BBC’s flagship Today programme on Radio 4, former deputy governor of the Bank of England and academic Charlie Bean, said it’s Bank policy to impose a 5% pay cut on the UK, using interest rates and QE.
This was also Bank* and Treasury* policy from the summer of 2007, when New Labour* was in charge. It’s not new and the only thing the sado-monetarists know, going back decades.
I worked with the Bank from 2008 – 14 and was offered a financial stability job in December 2021.One kept and keeps hearing the phrase internal devaluation.
That’s why I supported Liz Truss’ proposal to reform the mandate of the Bank of England and add growth and employment targets to balance its 2% inflation target. After the Bank of England led coup, the adults were soon back in charge and no more was said about the idiocy of central bank independence and inflation monomania.
The NC community should not kid itself that things will get better under Starmer. His shadow chancellor, Rachel Reeves, is a former Bank and IMF official and City (HBOS) economist and even more of an inflation hawk. Reeves and shadow Home Secretary Yvette Cooper, wife of Brown’s brains Ed Balls and a former economics journalist, are also determined to crack down on welfare recipients, carrying on what they did under New Labour.
*These crackpots won’t accept that they contributed to Brexit.
Starmer’s “Labour” is unworthy of the name.
1. If you watched the Frontline piece ‘The Age of Easy Money’, you might think Powell was doing what was necessary and long overdue… if too rapidly for an economy long addicted to cheap (practically free!) credit. Powell is ‘the adult’ in the room.
2. From what we could see traveling over the last few days, we’re already in a recession… except Costco, that place was very busy even at those inflated prices.
3. From Northern Colorado to Santa Fe, NM, east and west of the I-25 corridor we saw housing going up. Apartment complexes and starter houses mostly. If I lift one of the window shades in this 5th wheel I’ll be looking at homes being built where once there was open land. Open land and farmer’s fields are being filled with ticky-tacky houses in the 100 Acre Woods of some of my fondest memories. Who will buy them now?
Yes. Rates should have been raised way before they started to raise. All the idiots in the room were talking about “transitory” inflation, what BS. And having to read about corporate price gouging? Seriously? By the way, do those people who believe in price gouging want government to fix prices for consumers? Just joking. Also, do they know that inflation is basically a tax on the poor?
Why should rates have been raised earlier? Are you labouring under the orthodoxy’s illusion that higher rates actually do what they say they do? I’m at the very least highly sceptical, per Mosler. I don’t doubt that high enough rates can cause a recession, which craters demand, but that’s the economic equivalent of the medieval practice of leeching, a treatment worse than the disease.
And price gouging is real — it’s right there in the data. Whether or not the solution is price controls or anti-monopoly measures is open to debate, no joke: both Galbraith pere and Isabella Weber would have something to say about that.
Are you in Denver? I’m running a project with 3 warehouses, developer has no idea who the tenants will be…I think they will be hurting soon. I’m just glad I have another 9 months of employment. Somehow we just got awarded for 3 more in town by the same developer that will start in June. I wont complain.
I hear you on the housing, number of people moving to Colorado dropped as well last year to 17,000 from the 70,000 average we had been running so that will hurt as well. Either way per Colorado Housing authority says there is still a shortage of about 100,000 units if we want to return to the historical average ( a metric of population vs units ). Most people in my industry still think that developers starting apartments later this year will be put on pause, but will be open season again next year. I have been pricing 2 apartment jobs that are supposed to start Q1 24′ and those developers have no intention to pause permitting right now.
My industry was heavily effected by supply chain issues the last 24 months but is really starting to stabilize now. Some commodities like steel have come down 20% in price, so people are reacting to the market conditions quickly despite the heavily entrenched monopolies.
I appreciate the data points Spider Monkey.
Very interesting info.
Sincerely.
My funny working brain is having a hard time putting words on paper this morning. The phrase “peak profiteering” is getting in the way.
In all the discussions as to methods of addressing banks and their pension for excess, no one has address the issue of derivatives. Whether the IMF or other financial authorities know or guess on the vast amounts of derivative contracts, the assertion that hedge fund owners have ‘preferred creditor status’ is the most terrifying aspect of this recurring situation. Comments are important.
So far, there isn’t evidence that derivatives are part of this crisis. We would have been hearing about concerns about increased counterparty risk, increased haircuts on repos, and difficulty in rolling over existing positions.
Most derivatives clearing has been moved over to central clearing houses, so they, not the banks, are the TBTF entities on derivatives. We’ve been writing about that for years.
Indeed. Might this be our first real exciting test of the central clearing counterparties (CCPs)? Recall that the London Metals Exchange (LME) blew up when nickel prices got jumpy in response to Russia’s invasion of Ukraine and the sanctions regime onset and they had to halt trading for nearly a week. It’s being litigated to death now.
However, one enormous caveat is the FX derivatives market, which is primarily bespoke OTC and the second largest derivatives market after interest rates. And we have the interesting BIS-led pronouncement (a valid one I think) that the principal owed at the close of FX forwards should be marked as debt, rather than lurking off-balance sheet as nill.
https://www.bloomberg.com/news/articles/2023-03-22/rescuing-first-republic-risks-leaving-bank-stockholders-stranded#xj4y7vzkg
From the link: “First Republic Bank’s portfolio of underwater loans and securities has losses of about $26.8 billion, leaving a negative common equity of $13 billion.”
This is almost certain to discourage any private acquirers. Looks like Uncle Sam is twisting in the wind once again.
I appreciate Yves point that the Fed only cares about the domestic market and that the dollar is USA’s to control and the rest of the world to adjust to. I still believe the Fed is the third arm of USA foreign policy. In crushing the USA workers, foreign policy comes home. The imposition of global corporatism tries to crush all world societies. Today the West/USA has three arms to implement this policy: military, sanctions (including extradition orders), and the dollar (Fed, IMF and World Bank.)
The world is responding. I never thought we would see a return to the 1950’s tripartite – West, Soviet. Non-aligned. And just like the 1950’s, the skillful diplomats are not in the West. The USA has had 75 years and multiple opportunities to bring to fruition its “ideals”. But it has always proven there is only one ideal; the Federalist ideal is supreme (Washington, Hamilton and Adams). A few chosen ones must lead, we just pretend we are not modeling the aristocratic form of government. Today we seek to destroy the Russia/China and the India/Brazil centers of power.
The 1950’s was a time of idealism – Nehru, Hammarskjold and Sukarno, among others, along with liberation theology and the demise of colonialism, offered a worldview of hope and opportunity. The USA countered all with oppression and the excuse “we are fighting Communism.”
Today, unfortunately, the three factions all offer authoritarian control. From what I can discern, the West is more predatory toward their own citizens. I believe this is because of continuous failures on the world stage. Ultimately, the result is undermining the foundation of society. The philosophy of ‘break things and move fast’ has proven to be a false profit / prophet.
Now they are limited to three inept hammers to apply to the world’s nails. The nails are on the move so the USA is playing Whack a Mole. I do not think they are competent. The Fed is, I believe, one of the incompetent arms. Therefore, they cannot change tack because the hope is higher interest rates will force small countries to heel to the will of the USA and align against the non-aligned and the Russian/China centers of power.
I’m going to do a devil’s advocacy.
Raising interest rates squeezes a lot of capital mis-allocation out of the marketplace. Zombies finally die, asset valuations fall.
There’s some good in that, is there not?
And there’s still quite a bit of money sloshing around in the marketplace that was released in the past … few decades.
Are payroll numbers affected yet? Unemployment rising yet? Not much so far as I can tell.
The easy money was the tool of choice to goose an economy that has some big fundamental problems, including wealth concentration, automation, off-shoring, waste (mat’ls and energy) in the real economy’s production processes, etc.
Those are very big problems to solve, and we choose easy money as the (deferral) tool. Not just the Fed chose it, but almost all of us piled on-board. ‘Twas good times!
The remaining – evermore remaining – question is “when do we get a viable econ policy?”
Till that happens, we bobble back and forth between stupid-easy and slightly-tighten-so-we-can-easy-again.
This is a fair point. PE depends on free money, so, no-longer-free-money means less PE, less mergers, less speculation.
All good things. It will raise unemployment (eventually) and cause a recession (eventually).
Better regulation of corporate greed-profits would have been much more to the point, but, this is the Stupidest TimeLine Evah.
So interest rates are what we get.
I tend to agree with you Tom. Low rates didn’t cause CPI inflation, because people tend not to buy staples on credit. What they did was jack up stock prices and housing prices, the things that people/companies with massive amount of available cheap credit tend to buy.
Now they are surprised that their interest rate hikes don’t lower CPI, but have caused the stock market to drop from its 2021 highs and home and car purchases to go down.
Meanwhile corporations have taken the opportunity to abuse the specter of inflation, by increasing prices (exacerbating inflation) and banking all-time high margins. My expectation is they keep doing this idiocy until they eventually cause a consumer credit contraction that actually will produce a crash.
My personal thinking is that there does need to be some sort of relatively risk-free rate of return to encourage savings and discourage stupid risk taking. But that rates don’t really impact CPI much so anything above 3-5% is just needlessly restrictive
An economist who correctly predicted the Great Financial Crisis says the world’s central banks have chosen ‘class war over financial stability
A little twist on a Buffet quote:
“When the tide goes out, you can see who bought a bathing suit they can’t afford.”
IIRC, there was a Greenspan put, and a Bernanke put, … now we see the Powell put.
The failures of Powell are many, yet he has Biden’s full support. We are about to have a Hillary redux in 2024.
From where I sit after spending my entire financial life avoiding debt and increasing my savings, I have spent the last 20 years watching my savings diminish day by day due to the zero interest mentality. Now that I am finally seeing money being earned by my savings my take is that the interest rate the FED states is way too low. Raise it high enough to crush inflation. I am a saver and have been all my life. My savings are what will allow me to have a rational life until I die. I am 75. If you have not avoided debt and have not saved then I have no sympathy for you situation. You don’t need the latest whiz bang cell phone or whatever else you buy on impulse and cannot afford. I don’t see a single person in government at any level doing anything beyond showboating and gaslighting other than the FED. Show me one person in government who actually has accomplished and single substantial change for the people of this country instead of “changes” to special interests so that they get campaign contributions. The FED may not be the best but at this moment no one else is doing a damn thing but whining.
Do you imagine the generations that followed yours have had the opportunities to save like you have? Your college cost next to nothing, you could buy a house for next to nothing, and the class war hadn’t been kicked off yet by our betters. You do seem awfully proud of yourself though. Not everyone got the chance to live a privileged life like yours.
I did not go to college. I bought my first house when the mortgage rates were variable and at signing the interest was 10.2%. Proud that I have no debt? What’s wrong with that? Should I be ashamed I was financially responsible? I avoided the debt trap. Privileged? Come look at my hands from 60 years of hard physical labor. Learn from your elders. Avoid debt and save.
What can our elders teach? How to effectively pull the ladder of opportunity up after them?
I think one can be proud of oneself and one’s achievements while also having empathy for others who, for countless and unknowable reasons, haven’t achieved the same.
Powell is using a blunt instrument to be sure, however it’s currently the only tool in the box.
Too bad Congress has long since abrogated its duty to use fiscal policy and tax those whose excess wealth has so completely distorted our economic system.
It seems like targeted tax policy would be an effective way to decrease asset inflation as well. It would seem to pull money out of the system. Rather than eliminating jobs how about taxing people at all levels? Would that not decrease spending. And in terms of costs essentially every material thing we buy is made in the far east. And if services inflation is an issue taxing service providers like doctors and lawyers more heavily would make a lot of sense. Why do lawyers like the ones doing the FTX case deserve to make 2000 dollars per hour.
This reminds me of the “tech bubble” of 99/00…
Too many average folks were getting too much, and it had to be stopped.
After COVID, workers got too “uppity”, and the Corps got very greedy.
The Corps artificially inflated… everything, and the workers simultaneously,
said… enough!
Now, the “ruling class”, vis a vis the Govt. need to fix things!
Welcome to messed up economy 2023!
Keep in mind that individuals like Morris Pearl (a former managing director at Black Rock) may be largely talking their former employers book rather than voicing authentic concern for the little guy facing high interest rates.
We are now in the financial age of asset manager capitalism (see writings of Benjamin Braun). On the revenue side, asset managers, like Black Rock, are interested in maximizing their fee revenues and thus their assets under management. Aggregate asset prices are the variable of greatest interest to conventional asset managers. This is because the fees they charge are calculated as a percentage of the current value of a client’s assets.
Consequently BlackRock is quite interested in macroeconomic policies that sustain high asset prices–with the firm being a persistent lobbying entity for expansionary monetary policy.
Speculating on another possible rationale for Chairman Powell’s fixation on labor and labor costs: the US labor force participation rate is meaningfully below the pre-pandemic level.
The tail end of the “boomer” workforce is starting to retire (the 1958 to 1964 cohorts are or will soon be eligible). Anecdotally, there seems to be a meaningful impact from long-covid in terms of number of employees and (speculating) the quality of work delivered (consider the number of reported commercial aviation incidents in the past months including near misses, wrong taxiways, etc). Retirements + long-term disability cumulatively equals fewer workers available which should lead to higher wages. Better to slow inflation and tamp down wages now via a recession than try to put the higher wage genie back in the bottle.