Responses by the Fed will likely be well received.
The events surrounding the Silicon Valley Bank failure and the regulatory takeover of
Signature Bank are not only grabbing headlines, they are also creating consequential
shifts to Federal Reserve interest rate policy.
While much has already been written about the causes behind the bank failures, we
offer a few observations about the current environment:
1. Stabilization Efforts are Underway
In the wake of the dual bank takeovers, the Fed, along with the U.S. Treasury, moved in
with decisive action, attempting to calm investors and account holders quickly. Each
bank carried its own idiosyncratic risks, one to tech start-ups and the other to crypto.
Neither situation is believed to represent broadscale vulnerabilities, but it will take time
for the jitters to settle.
2. Pressure is on the Fed to Pause Rate Hikes
Prior to last week, many fed watchers believed the Fed’s future path was going too far.
Critics argued disinflation was already working within the economy, and ongoing hikes
were premised on outdated and lagging housing data. To continue hiking higher was to
place the economy at risk of a hard landing.
A Fed pause, on the other hand, would allow businesses and investors to normalize
around a new interest rate environment while reducing uncertainties. Furthermore, it
brings the Fed one step closer to eventual rate reductions.
A Fed pause, on the other hand, would allow businesses and investors to normalize around a new interest rate environment while reducing uncertainties. Furthermore, it brings the Fed one step closer to eventual rate reductions.
3. Slowing/Pausing Rate Hikes would be Welcomed by Equity Investors
To the surprise of many, the economy has demonstrated notable resilience even as
inflation and interest rate hikes offered challenges over the last two years. While some
pockets of the economy are clearly strained (e.g. technology, real estate), there is still a
substantial proportion working its way back from COVID-policy interruptions.
With inflation peaking last June, many are hoping ongoing growth will lead markets
upward. An earlier-than-expected Fed pause would likely boost investor morale.
4. Unlike Last Year, Bonds are Performing Their Safe-Haven Role
Yes, the events of the last week facilitated turbulence as equity markets adjusted to
unexpected developments. However, it’s been comforting news that high-quality bonds
delivered positive gains over the last week and resumed their role buffering portfolio
5. Inflation Still has More Progress Coming
After a flat CPI report in January, policy leaders’ concerns eased a bit with February’s
improvement. The latest inflation metric reported at 6.0% year over year, still too high
for anyone’s satisfaction. However, over the course of the next four months, the
inflation metrics will drop off three huge months from 2022. By July, policy leaders will
have a much clearer picture of where the new run rate in inflation stands.
6. Portfolio Positioning
Harman Wealth’s positioning is still cautiously optimistic and focused on the longer
term. Portfolios remain well diversified and anchored to a neutral orientation. Fixed
income positions are focused on either higher quality or shorter duration aimed at
reducing overall portfolio risk.