Fed stays the course on inflation

The 2nd largest bank run in US History, the downfall of Silicon Valley Bank, along with a near system-wide meltdown caused by this failure, didn’t trump the Fed’s bigger issue at hand - persistent inflation. At this week’s FOMC meeting the market was calling loudly for a pause. Five US bank failures in a week, followed by Credit Suisse, warranted such measures. But it’s not normal times, with inflation at levels not seen in 40 years. The Fed proceeded with a 25 bps hike to 4.75% - 5.0%, the smallest possible increment to show continued commitment to its inflation battle. Without clear public consensus on the idea that the majority of US banks have the same deposit problem as SVB, the message did its trick; markets calmed right away.

One can only imagine the deliberation leading up to this decision. How would the public perceive any move? Pause and the world thinks the banking crisis isn’t over. Continue with rate hikes and they reaffirm to world, in a weird way by actually hiking rates, that the crisis has passed. Oddly enough, “handling” the bank crisis means deposit back-stops and other money printing measures designed to stabilize the financial system. However, these measures were the root issue of inflation in the first place. To illustrate, the Fed’s QT effort of the past 12 months, rolling roughly $1T off their balance sheet, was reversed by a 50% increase in mere days.

Back to square one of easy money and over-inflated Fed balance sheet? What happens if a bigger crisis then a handful of failed banks comes next? Infinite money printing? Questions for the road ahead as we continue to venture deeper into the most unprecedented money policy in recent history.