22 March 2023

Trying to Catch a Falling Knife, and Failing

The beatings will continue until the morale improves
So, the Federal Reserve only raised its benchmark Federal Funds rate by 25 basis points (¼%) today.

They are attempting to forestall a wage price spiral, one which is not remotely close to actually happening, given that inflation is was at 6%, while wage growth was only 3.6% year over year.  (Lower wage workers are doing better than that, so there has been some compression in wages [a good thing] but that is irrelevant to the inflation argument)

The Fed is in a tough position, because they have to choose between overreacting to inflation, which is what they get praised for, and not torpedoing the banks, who are their real "customers", who stand to suffer major losses and potential liquidity crises from their portfolios of hold to maturity bonds:

The Federal Reserve approved another quarter-percentage-point interest-rate increase but signaled that banking-system turmoil might end its rate-rise campaign sooner than seemed likely two weeks ago.

The decision Wednesday marked the Fed’s ninth consecutive rate increase aimed at battling inflation over the past year. It will bring its benchmark federal-funds rate to a range between 4.75% and 5%, the highest level since September 2007.\

Fed Chair Jerome Powell said officials had considered skipping a rate hike after banking stress intensified last week. And he hinted that Wednesday’s increase could be their last one for now depending on the extent of any lending pullback that follows a bank run earlier this month. Regulators shuttered Silicon Valley Bank and a second institution, Signature Bank, two weeks ago, and bailed out uninsured depositors to stave off a panic.

History rhyming

While all this is going, we are seeing home prices falling YoY for the first time in 11 years, and if that does not bring back memories of the great recession, you were probably pretty f$#@ing young, or in a coma, at the time.

The first year-over-year drop in home prices in more than a decade and a dip in mortgage rates snapped a yearlong streak of declining monthly home sales, showing the effects of the Federal Reserve’s campaign to raise interest rates.

Sales of previously owned homes, which make up most of the housing market, rose 14.5% in February from the prior month, but were down 22.6% from a year earlier, the National Association of Realtors said Tuesday. Sales had decreased for 12 consecutive months through January.


Buyers benefited from a slight improvement in affordability as home prices ticked lower and mortgage rates eased from a 20-year high touched last fall.

The national median existing-home sale price fell 0.2% in February from a year earlier to $363,000, the first year-over-year decline since February 2012. Median prices, which aren’t seasonally adjusted, were down 12.3% from a record high in June.

Mortgage rates topped 7% in November, but fell to near 6% in early February, before fluctuating in recent weeks.

Note that this was all before Silvergate, and Silicon Valley Bank, and Signature Bank all struck an iceberg and sank.

In related news, it appears that a lot of money, something north of ½ trillion dollars has been sucked from banks over the past few years though a facility that the Federal Reserve has offered called reverse repo

Basically, instead of offering financial instruments for quick cash, banks and money market funds (the high fiance type, not the savings accounts at your bank that offer an additional ½% interest and require you to maintain a high balance)

This facility was intended by the Fed to help wind down their quantitative easing (printing money and giving it to Wall Street criminals) in a relatively orderly manner.

Instead, deposits in banks are down 3% as a result, meaning that banks have less, not more cash in reserve.

This one we can blame Ben Bernanke for, he initiated the program, not Jerome Powell.


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