Jerome Powell Strikes Again: Three Things to Know About Interest Rates, Inflation, And Bank Failures

By Ryan Casey Stephens,  FPQP®
Special Contributor

I loved reading “Choose Your Adventure” books when I was a child. At the end of key sections, the book would prompt you to make a decision for the main character. You’d skip to the page noted by your decision (for example: If you choose to save the princess, skip to page 20). You never knew what the outcome of your decisions might be, good or bad, but it was the fog that truly made it an adventure. Often, there wasn’t an easy choice. 

The Fed faced such a decision today and the choice they’ve made will have a ripple effect in the months to come. If they’d chosen to pause hiking rates, inflation might have run away again. On the other hand, their decision to raise will likely mean greater pressure on midsize banks. Now that the choice is made, does trouble lie ahead? Let’s try to skip ahead in the book in this week’s Three Things to Know. 

Facts First

The Fed hiked their interest rate by one-quarter percent today, overtaking the record of their highest rate since the fall of 2007. They also expect one more quarter-point hike this year. The rate will likely be near 5.1 percent at the end of 2023, and 4.3 percent end of next year.

In his press conference, Fed Chairman Jerome Powell noted that there are still far more job openings than laborers, leading to low unemployment and rising wages. Home purchases have slowed, which he attributed to higher interest rates. He was pleased that inflation had “moderated from its peak” of 8 percent last year, but is unhappy that it still remains above 5 percent. 

First Thing to Know:

The basics remain in place — Chairman Powell clearly stated that inflation is the singular focus of the Fed’s efforts at the moment. Unless a major crisis materializes on a nationwide level, expect one more rate hike this year.

No Systemic Concerns

No one saw the recent bank collapses as a possible outcome of the blindingly-fast hikes last year, but that didn’t stop Chairman Powell from owning it as a predicted outcome. Answering the first question in the press conference on the stability of banking, he stated that credit pressure on banks and lenders is something we’ll see more of following their decision to hike. Powell called Silicon Valley Bank an ‘outlier’ and blamed its collapse on reckless management and a “large group of connected depositors” committing the most “rapid bank run in history.” 

He neglected to mention other national and global bank struggles in recent days such as PacWest or Credit Suisse, stating repeatedly his belief that the banking system is strong. Market experts will undoubtedly speculate in the coming days whether that’s a little positive propaganda from the Fed since they’ve also taken emergency measures to provide banks money when they need it. 

Second Thing to Know:

With nearly 200 U.S. banks at risk of collapse, the Fed had no choice to open sources of cash flow to them. However, Powell believes that won’t be necessary and claimed the collapses are “outliers.” 

Easing Inflation

With the decision made to hike rates, we must hope that most banks remain healthy and inflation continues to come down. The collapse of Silicon Valley Bank certainly opened the eyes of many in bank management, and those folks have likely already begun to make decisions that will secure their investments. If they can make it through the year ahead, future rate cuts will ease the burden once inflation is under control. 

Inflation’s almost certain to ease this summer. Shelter cost, AKA rent, will likely see lower figures in the months ahead, which leads us to think May and June’s inflation reports should give us a break. If that occurs, bankers need only worry about pressure from high rates for another year or so, then easing should be on the table. If however inflation persists into the summer, Chairman Powell sent a clear signal today — all bets are off in the fight.

Third Thing to Know:

Now that banks know they come second in the fight against inflation, all eyes will be on the early summer inflation numbers. If stubborn inflation persists, more rate hikes could be on the table, and the pressure on banks and lenders may only just be beginning. 

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Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].