February’s very strong unemployment report has raised fears the Fed may go back to 0.50 percent rate hikes, or even 0.75 percent (which it's done four times), because of the continuing strength of the labor market.
But maybe not. They might even pause further rate hikes, because the failure of the Silicon Valley Bank and several smaller banks could set off alarm bells at the Fed, catching some smaller banks off guard that invested heavily in Treasury and Mortgage-backed securities when rates were at rock bottom.
Job strength was mainly in the service sector, according to the Labor Department’s unemployment report. Leisure/Hospitality and Education/Health once again added most new payroll jobs in February followed by retail trade, professional services and government, as we recover from COVID-19.
The U.S, has created 4,349,000 jobs since February 2022, so quickly has been the recovery. That’s more than 362,000 jobs per month, unheard of in a post-WWII recovery, and the rest of the world is playing catch-up.
In fact, February 2022 to February 2023 has been the best 12 month period of job creation since 1980 per the Calculated Risk graph.
But it now looks like the sudden rise in inflation since the pandemic might have panicked Fed officials to raise rates too quickly—4.5 percent since last June. The result may cause more small banks to fail, which in turn might require a pause in their rate hikes, or even to reverse course sooner.
It’s becoming evident that the sudden rate increases have caught some banks flatfooted. Barron’s Magazine has listed 20 banks in a similar position to fail, if the bad news precipitates more depositor withdrawals.
Greenspan’s Fed boosted its rate 4 percent in 0.25 percent increments over two years. Yet it still precipitated the Great Recession, in part because the GW Bush administration stopped regulating Wall Street firms almost completely, which permitted the liar loans that ultimately failed and caused the busted housing bubble.
The Trump administration has acted similarly by easing oversight on mid-sized banks that could have precipitated the current missteps.
So are we looking at another banking crisis, such as occurred during Alan Greenspan’s Fed and the Bush administration?
We should be in a different world because of the banking reforms post-Great Recession. Bank balance sheets have been greatly strengthened and financial markets are more tightly regulated.
And there are many inflation elements outside of the Fed’s control that may bring down inflation. Supply chains are returning to normal, and corporate profits are coming down from the stratosphere. The Biden administration is also attempting to reduce trade tariffs to bring down import costs that businesses pass on to consumers.
But the Fed has never raised interest rates as quickly before in their history. The latest failures should be a lesson that might change some minds at the Fed.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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