Op-Ed: Tier-1 Brokerage Believes Jerome Powell Is Unfit To Lead Fed If He Backs Down On Rate Hike
Two weeks ago, it was obvious the Federal Reserve needed to hike interest rates 50 basis points in order to effectively combat inflation. Today, it’s obvious Jerome Powell must do nothing or risk imminent disaster.
This extreme shift in sentiment among investors and expressed through short-term Treasury bonds is with little precedent, evidenced by the 10-plus standard deviation move in two-year notes in the aftermath of this month’s Tech Bank Collapse.
Many argue a pause by the Fed is a completely rational adaptation to the situation at hand. Chair Powell’s told us many times he’s data-dependent; is he situationally dependent? Are the circumstances surrounding Silicon Valley Bank’s demise a demonstrable change in the economic situation?
If we discovered something dramatically new from the SVB fallout, the answer may be yes. But we haven’t discovered anything new. We just saw, abruptly – rudely – the implications of problems that have been publicly stewing for a year.
Anyone with a chart of crypto, SPACs, IPOs and the Nasdaq the past year knows Silicon Valley was the problem area, geographically and financially. The writing was literally written on the wall of the bank. Who didn’t know West Coast tech became a cesspool of speculative excess, rotten capital and self-dealing between the richest of the rich the past three years?
And who’s been stubborn enough to ignore the bond market’s messaging about impending risks? The degree to which unrealized losses in bonds were piling up wasn’t a popularized fact, but some of us have been shouting about the inevitable fallout from an historically inverted Treasury curve for months. Regional banks were specifically highlighted as a major risk point several times on my shows the past three months.
If these things are surprising to Jerome Powell, he shouldn’t be Fed Chair. We are truly in dangerous hands if something like this wasn’t in his framework for the first hiking cycle off the zero bound. Yes, financial conditions initially tightened as SVB crashed and lending may slow at small to midsize banks, but the government has fully bailed out depositors and effectively backstopped bigger banks. The yield curve is substantially wider than before, and the strength in stocks and risky assets is reminiscent of the COVID-era overstimulation that contributed to this mess.
If 50bps was obvious two weeks ago and 0 is obvious today, the best answer for Powell is to do 25. Acknowledge the actions Treasury has already taken, demonstrate confidence that the destructive nature of rate hikes is part of the healing process, and at the same time show you have range. It’s a great opportunity for Jerome Powell to display confidence, control, and focus on the root of the issue: too-low rates and too-high inflation.
This article was originally published on Benzinga and appears here with permission.