A while back we mentioned the FOMC – Federal Open Market Committee, lead by Jerome Powell were in a Pickle .. as at that time one of their regional banks had a research report out that GDP- Gross Domestic Production -Economic Growth indicator – was dropping fast and they were going to raise interest rates against a hot CPI = Consumer Price Index – blunt inflation gauge which would exacerbate the situation.
Fast forward to today and that Pickle is not any better…. maybe even more dill! With the afore mentioned Part 1 Advance Analysis M2 review showing dramatically dropping or the pulling of liquidity out of the system, bank fatigue has been seen and felt and here our comments on Banks being a slave to confidence for solvency.
On Wednesday of this week, March 22. 2023 the FOMC is bound by their goal of slowing that sticky inflation we are all seeing, especially at the grocery store, and best measured by the CPI … BUT, this additional rate increase will add fuel to the fire of less liquidity, AND on top of that our neighbors across the pond just raised rates .50% last week, albeit from a much lower 3.00 to 3.50% rate….currently the US rate is 4.75% …
We did say Pickle ? Right….
Enter the BTFP – Bank Term Funding Loan Program – Happy Bank Program
On March 12, 2023 the Federal Reserve Created the BTFP as another backstop for possible Bank Fatigue ..
Press Release
March 12, 2023
Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors
For release at 6:15 p.m. EDT
This new program is a sort of Fed Discount Window on Steroids, meant to improve Bank confidence.
Quick History–
Long ago the FED (going back in loose form to the 1920’s – the start of the Fed) started a program for Bank help during stressful times, the Fed Discount Window –
Fed Discount Window –
- Operation of last resort for a bank
- Overnight deposit help
- Anonymous for two years
- 30 day length, but historically has been lengthened to 90 days
- Pledge of assets for security – Treasury Securities of all Maturity among other items that are held at par (even value, no gain or loss) or better
BTFP – Bank Term Funding Loan Program
All of the above but the following additions:
- On Year in Length maximum holding period
- Pledge of asset securities that may be less than par aka at a loss
The last bullet is the most important and lending a helpful hand from the Fed’s fastest in history rate increase…. as mentioned repeatedly, increase of rates are a headwind to Fixed income aka Bonds, especially longer term bonds….
Some Banks may be seeing a need for immediate liquidity due to loss of confidence and liquidity drain, so this new program essentially gives them liquidity to meet those demands if needed and may have negative assets due to the fast fast rate increases!
Headlines Continue
While this is being written – Sunday late morning in between Newsletter Articles, UBS a Swiss neighbor of Credit Suisse has made a much telegraphed offer to buy their friend out… no idea what the market will make of this starting tonight as overseas markets open…. but something just crossed the mind that we have mentioned many times before…. and may be applicable….
“Headlines are always the worst near the end of the Cycle!”
Have a Great “Heads Up for a Busy Week” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
Robert Kaplan Speaks Candidly, Echoes Our Main Thoughts for the Newsletter – NICE – There is Still Stimulus out there and Higher for Longer!
The Forward-Guidance podcast review, recommended from one of my coveted study buddy groups, a week or so ago!
With downtime over the holiday weekend and the newsletter not being in print just yet… Robert Kaplan’s comments from a podcast came in very much in line with some of the articles in our coming Q 3 2023 newsletter, as such we had to bring you up to speed on this podcast. NICE!
Recall Robert Kaplan was a Dallas Federal Reserve President, before getting caught up in a political issue and he along with several other members ended up resigning.
What stands out about this podcast is the candor that Kaplan gives, which is what we are always looking for. Is it because this is a less than hugely popular podcast ? … although it will make my regular check for subject matter from now on, Or it is due to the resignation which would make Kaplan never available for public service again? …so he has nothing to lose period. Does not matter the reason his candor again is what grabbed attention.
The just over one-hour podcast which can be found here (Forward Guidance), had three important points to bring to your attention:
There’s still stimulus flowing in through the system- Again one of our articles in the coming Q 3 2023 newsletter speaks about the ERC or employee retention credit, Kaplan mentioned specifically talking to many mayors of many cities across the United States which have an abundance amount of stimulus capital still on their balance sheet that must be spent before 2025. hmmmmm
Higher interest rates for longer should be the baseline assumption according to Kaplan– Again this is the subject matter of another of our newsletter articles. Kaplan speaks to the podcaster candidly and says capital markets even though we were just beginning a credit cycle (Tightening of lending standards, less loans, higher interest rates and lower margins, increased defaults all the intent of the federal reserve’s higher rates to slow the economy)- while capital markets and participants are pricing a lower interest rate at the end of 2023 and the beginning of 2024, Kaplan cautions participants to take Jerome Powell at his word. The only thing that would make him change his posture is some large event created by the further progress of the aforementioned credit cycle.
It is a good old boys club– In an aha moment that we always thought existed, Kaplan slips and says his dissenting vote in September of 20 was a frowned upon event by Jerome Powell! However he quickly corrected himself and said I will let Powell speak for himself, but the rabbit was out of the hat, Kaplan realizing this went on to say that the general spirit of the FOMC (Federal Open Market Committee) is everybody agrees and falls in line with a distinct hierarchy of ranking. We could all remember and learn that there is a very much pecking order where the king is the chair, and the pawns are supposed to follow.
Apologies for the length of this post, as mentioned with some time off and the dictation in hand, along with a total complement to our pending newsletter, wanted to bring this to your attention.
Have a great “Inside the Federal Reserve via Robert Kaplan” day!
John A. Kvale CFA, CFP
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Posted in Debt - Debt Management, Economy, FOMC, General Financial Planning, Interest Rates, Investing/Financial Planning, Market Comments
Tagged FOMC, Forward Guidance, Interest Rates, Jerome Powell, Newsletter, Podcast, Robert Kaplan