May 3, 2023
The Fed hiked another 25 basis points today. That takes the Fed Funds rate to the 5%-5.25% range.
In the press conference, Jerome Powell, once again, made a good case for why they should have done nothing.
He said "policy is tight." He said "real rates are around 2%, meaningfully higher than the neutral rate." That's clearly restrictive territory.
And for a guy that has spent the past year trying to kills jobs, as a means of controlling inflation, today he says "it's possible that this time is really different." In that, he meant that the job market can cool, as in the evaporation of 1.6 million job openings since the beginning of the year, and yet unemployment can still hang around record lows.
So the Fed is at 5%. Along that path of rising global interest rates, we had a near sovereign debt crisis in Europe, that was fixed by another emergency European Central Bank bond buying program. We had a near insolvency in UK pension funds, that was fixed by Bank of England government bond buying intervention.
And now we've had bank failures in the U.S., that have been fixed by coordinated action from the Fed, Treasury and the big banks. About this, Powell says that "financial stability tools and monetary policy are working well together." The manipulate and fix strategy is going well, he says.
We may see that in practice, again, before the week ends. Shortly after the Fed meeting, we find that another bank is on the ropes. It's PacWest. Remember, from my note yesterday, the three banks that have failed over the past six weeks are not typical regional banks, but rather, specialty banks.
PacWest is effectively Silicon Valley Bank by a different name.
PacWest acquired Square1 Bank back in 2015. Square1 was the east coast version of Silicon Valley Bank. It banks venture capital firms and their portfolio companies.
Now, perhaps more important than all of this, is the drone attack on the Kremlin overnight. While the mainstream media is debating the validity, let's look at what markets are telling us.
In a war escalation scenario (global war), we would see global capital move to relative safety. That would mean, U.S. Treasuries (up), gold (up) and the dollar (up).
Treasuries are indeed up (yields down). Most notably, gold is challenging the record highs again (up $100 from the lows of Tuesday). But the dollar isn't participating, yet … nor is oil (which should rise on war escalation).
For my Billionaire's Portfolio members, please keep an eye out for an update from me on the portfolio.