Ed O’Dowd welcomes Markets Policy Partners Brendan Walsh and John Fagan. They discuss the changing market conditions since their last appearance on the show in December. The focus then was on Fed rate hikes and concerns about inflation, while the present focus is on the Silicon Valley bank failure and the fear of what’s going on with the banks. The speakers review their earlier predictions and discuss their current views on the market.
Watch the Briefing Here
Silicon Valley Bank and What is happening in the market (1:00)
• 1:28 Comparing the changes the have occurred since December 2022
• 4:37 Fed tightening and how what to expect from rates through Q1 2023
• 4:56 Silicon Valley Bank and fed bailout
• 6:50 Expecting bank crisis to settle down and should not see a wide spread banking crisis
• 7:24 Should see a large pullback of lending in the coming quarters from larger banks
• 8:56 February inflation is not as high as expected, should see the Fed try and strike a balance between rates and inflation
What is the Fed doing? (10:42)
• 10:44 The Federal Reserve (Fed) is expected to be reluctant to use rate cuts to address the current crisis
• 11:02 Instead, the Fed is more likely to pause quantitative tightening and balance sheet roll-off. Rate cuts are seen as a last resort due to elevated inflation
• 11:57 Fed is looking to avoid a stop-start dynamic in monetary policy that led to a “bubble crash” in the past.
• 13:10 The Fed is concerned about the “unrealized losses” that are symptomatic of the low interest rate era
• 13:30 Predicts that a mild, potentially lengthy recession is likely to come in the second half of the year, which could be deeper than expected.
• 16:20 No fiscal stimulus is expected, and the Fed is unlikely to provide the kind of monetary support that it has in previous cycles. Yield curve expected to re invert as the Fed digs in its heels on rate hikes.
• 16:56 Debt ceiling and what is causing it to look scarier than in the past
• 17:57 Market will stay volatile and we will see small and medium sized banks under pressure from this
Upcoming FOMC Meeting (19:26)
• 20:05 Discussion the upcoming FOMC meeting and the possibility of a 25-basis point rate hike, followed by a pause.
• 21:14 They also discuss the potential risks and challenges that come with this tightening cycle, including the Kink in the yield curve and the Silicon Valley Bank.
• They predict that the messaging from the FOMC next week will be data-dependent and that they will maintain maximum optionality for the next meeting in May.
• 23:33 What’s going on in China and Chinese stocks taking a plummet
• 25:15 No sign that the U.S. will go easy on China in the coming months
• 27:01 Overall, they believe that the process of tightening will be challenging and present risks for investors, but ultimately necessary to close the book on the zero-interest rates QE era.
