It was going to be a big day for US Federal Reserve Chairman Powell, but Treasury Secretary Janet Yellen crashed the party.
Both provided clarity on respective matters, but it was Yellen who stole the show with her comments that there is not a blanket banking deposit protection plan.
We highlighted this a few days ago when Yellen was questioned by Congress. At that time, she said much the same thing, the full bank deposit program is in the background and is only applied on a case-by-case basis, and is mostly up to Janet Yellen’s own decision.
On that occasion, the market seemed to somehow miss those remarks, which were very different in tone from what we were hearing at the time of the SVB closure.
Quite simply, bank deposits are not fully guaranteed by the government beyond the usual $250,000. In some cases, if Yellen sees fit, a systemic risk categorisation will allow her to offer the program to a specific bank.
America’s regional banks remain largely without any further protection than previously existed. Regional bank contagion remains a very real risk. Especially, as interest rates continue to rise, and Yellen’s comments will only add to the impetus for some depositors to withdraw their funds from regional banks and move them to banks that could be deemed a systemic risk.
These are very unsettling developments for a market which had just become accustomed to the idea that all deposits at all banks were protected.
The Federal Reserve Bank’s 25-point rate hike at first saw stocks leap higher. Given 25 points was widely expected however, the initial buying was perhaps already overdone when Powell and Yellen began their comments.
The outlook for interest rates may still be higher than the market anticipates. The Fed’s expectations for employment and inflation remained the same despite the banking crisis. Powell also commented that though the banking problems would likely tighten credit generally and dampen demand, inflation was expected to remain elevated.
Hence, the decision to maintain the 25-point rate hike trajectory. We are now likely to see another two to three rate hikes of 25 points.
There is some joy for markets that the terminal rate could now be a little lower. Nevertheless, the pricing of rate cuts remains in the realm of fantasy economics, and Chairman Powell said as much. Highlighting that rate cuts are not among the Board’s outlook and considerations.
The stock market had rallied based on the banking crisis being resolved and that the Fed would miraculously cut rates this year. The rug was pulled none too gently from under both these hopes.
Volatility will continue. There could be a slight recovery after yesterday’s sharp collapse, but the dominant pressure will likely remain on the downside for some time now.
After all, the US has further banking crisis risk and is raising interest rates at the same time.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
