The FED Flunked Its Own Stress Test
In the aftermath of the failure of Silicon Valley Bank and Signature Bank, many rushed to blame their demise on a lack of regulation. In particular, they focused on the fact that these banks were not required to undergo a Federal Reserve stress test.
Recently, during Michael Barr's testimony before Congress, this topic came up. He is the vice chairman of supervision at the Fed. Sen. Jack Kennedy (R-La.) put a tough question to him.
“If you had stress-tested Silicon Valley bank in 2022, it wouldn’t have made any difference, would it?”
Barr claimed he didn’t know the answer.
Kennedy then pointed out that the Fed didn’t test any bank for the problem that took down SVB. “I’ve read your report,” Kennedy said.
“You stress-tested these 34 banks for falling GDP, spiking unemployment, and defaults in commercial real estate, isn’t that correct?”
Barr agreed and started to say that “in a typical adverse scenario for banks, we’re testing falling interest rates.”
But as Kennedy pointed out, that’s not our problem today.
The problem is inflation, high interest rates and loss of value in government bonds, isn’t it?
Barr “completely” agreed.
That means, as Kennedy pointed out, the Fed tested for the wrong thing in 2022.
The Fed’s James Bullard Fires a Shot Across Wall Street’s Bow
The Federal Reserve has begun to push the market away from the conviction that the second half of this year will see interest rates falling significantly.
President of the Federal Reserve Bank of St. Louis James Bullard stated on Tuesday that Wall Street was moving in an implausible direction by pricing assets to reflect a minimum reduction of half a percentage point, or 50 basis points, in the Federal Reserve's target rate by the end of the year.
Bullard claimed that Wall Street was unduly fixated on the notion that the banking crisis will tighten financial conditions and alter the outlook for the economy and interest rates in an interview with Bloomberg TV. He predicts that there is an 80% to 85% chance that the economy will develop along a "branch" in which the labor market will continue to be extremely tight, financial stress will lessen, and the economy will continue to grow slowly. The remaining probabilities point to a branch of heightened financial turmoil, where "all bets are off," according to Bullard.
“The problem with Wall Street is they’ve got too much probability on that branch,” - Bullard.
At the last meeting of the Federal Reserve, the Summary of Economic Projections showed that the median expectation for the federal funds rate at the end of the year is 5.1 percent, unchanged from the December meeting. The median expectation for the end of 2023 moved up to 4.3 percent from 4.1 percent, essentially pricing in one less rate cut than had been anticipated in December. That suggests that Fed officials expect inflation to be more stubborn than they had thought.
The dispersion of expectations among Federal Open Market Committee participants has also gotten wider, meaning there is more uncertainty about the future. Importantly, however, this widening has exclusively come from the upper end of the interest rate and inflation expectations moving higher. The range of forecasts for the fed funds rate had been 5.1 percent to 5.4 percent. At the latest meeting, the range moved to 5.1 percent to 5.6 percent. Similarly, the range for PCE inflation went from 2.9 to 3.5 to 3.0 to 3.8 percent. Core PCE inflation forecasts did not widen but did move up, going from 3.2 to 3.7 in December to 3.5 to 3.9 in March.
“Going into this weekend, they were pricing four rate cuts over the coming year,” Bloomberg’s Mike McKee asked Bullard. “Why are you and Wall Street so far apart?”
“They should listen to me,” Bullard said.
We expect that over the coming days and weeks, Fed officials will keep attempting to push Wall Street in this direction. Those who ignore Bullard now will likely come to regret it. - Breitbart
Meanwhile, Google is Cutting “Staplers”
Google said it’s cutting back on fitness classes, staplers, tape, and the frequency of laptop replacements for employees.
The latest cost-cutting measures come as Alphabet-owned Google continues its most severe era of cost cuts in its almost two decades as a public company. The company said in January that it was eliminating 12,000 jobs, representing about 6% of its workforce, to reckon with slowing sales growth following record head count growth.
Cuts have shown up in other ways. The company declined to pay the remainder of laid-off employees’ maternity and medical leaves.
“Just as we did in 2008, we’ll be looking at data to identify other areas of spending that aren’t as effective as they should be, or that don’t scale at our size.” - Google finance chief Ruth Porat
Living in Historic Times?
You may be tired of reading that in this space, but it must be pretty clear by now that the world around us is very different than just a few short years ago.
There is light at the end of the tunnel, but we must get through the tunnel first. That is my why that guarantees I will read and study at least an hour every morning.
