An April 2023 NBER paper warns that the Fed’s rapid tightening actions since 2022 were a monetary shock that has negative economic impacts for this year and next. Mind the lags. See Does Monetary Policy Matter? The Narrative Approach after 35 years; the conclusion:
“Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.”
A decade of near-zero policy rates allowed banks to boost profits by paying next to nothing on customer deposits from 2011-2021. Then, everything changed.
Below is a list of the largest seven US bank failures by asset size courtesy of BankRate.com. Suddenly and all at once, three of the four largest have happened over the last two months. See the WSJ: Why First Republic Bank Collapsed for valuable insight.
Central bank policies are evident in both leaping bank assets to 2022 and the record failures now unfolding—no free lunch. See, Too much Fed liquidity has led to a whack-a-mole world of problems:
While the decision by the FDIC to cover uninsured deposits remains controversial, enhanced deposit insurance, funded by higher fees, may become necessary for a period of time. It is not the fault of savers that the banking system is drowning in excess deposits. Savers, in aggregate, are captive victims of the Fed’s dogmatic “ample reserves regime”. Until it winds down this misguided experiment, global policymakers will continue their scramble to create new special programs, acronyms and emergency facilities to manage the whack-a-mole world of complications it has produced.
Hoisington Investment Management’s First Quarter 2023 Review and Outlook is now available; see Financial Cycles lead Business Cycles. The bottom line is that (lagging) inflation is receding with economic activity. Rising unemployment and higher government bond prices (falling yields) are par for this course as riskier assets keep losing lift.
“…with low or declining economic activity, the inflation rate will continue to recede. Further progress will be made in terms of moving consumer inflation into the Fed’s target zone in 2024. Therefore, with the historical pattern of the financial, GDP and price/labor cycles proceeding on its well documented path, this year’s decline in long-term Treasury bond yields is expected to continue.”
Cory’s Chart Corner
