Fitrst Quarter Economic Growth Improves

 Financial FAQs

Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the first quarter of 2026 (January, February, and March), according to the advance estimate released today by the U.S. Bureau of Economic Analysis. In the fourth quarter of 2025, real GDP increased 0.5 percent.

BEA.gov

“The U.S. economy has just powered through shock after shock,” was Fed Chair Powell’s summation of the state of the U.S. economy at his last press conference as Federal Reserve Chairmen.

First quarter 2026 real (inflation adjusted) GDP growth picked up +2.0% in the government’s first estimate, following +0.5% growth in Q4 2025, thanks to the $billions being spent in AI energy center build outs.

Kevin Warsh will take over as the new Fed Chairman in May, so there is speculation that he will push for easier monetary policy as President Trump’s pick for the new Fed Chairman by lowering the Fed’s interest rates and a more hands off management style.

Trump badly needs easy credit to maintain growth because of his economic mismanagement. A barely functioning government is either tied up in congress with the various shutdowns (last fall and current DHS funding), while illegal tariffs have choked supply chains.

Meanwhile, to Powell’s consternation, economic growth is picking up “through shock after shock”, from the Great Recession, COVID-19 pandemic, the 37-day fall government shutdown, tariffs, and the various wars that have caused energy prices to skyrocket.

The AI build out was predicted to boost growth, consumers continued to hold up their end, and government spent more on the Ukraine and Iran wars. The Defense Department reported the Iran war has already cost $25 billion in just the first two months.

And the financial markets continue to rally to new highs, so we are seeing some irrational exuberance, despite the game of chicken by Iran and Trump over the Hormuz Strait blockade. It’s obvious market investors continue to believe that Trump with his TACO policies will find a way to extricate American out of his latest war sooner rather than later.

But it also means $4 plus gas prices and soaring inflation for months to come. Even if the Iran war is settled sooner, predictions are that Middle East energy production won’t be restored to previous levels for at least one year.

The real problem is the Trump administration’s economic mistakes have taken us back to a Cold War economy—more military spending, fewer government social services, while endangering the good faith and credit of the U.S. federal government as the debt continues to balloon.

Something has to give, in other words. The financial markets won’t rally forever on the AI investment bubble, and consumers won’t keep shopping until they drop without an ensuing downturn.

The question is when on so many fronts. When will the wars end? When will enough consumers realize prices won’t come down and elect a congress that will control Trump’s extravagance and greed before he bankrupts the American economy?

When will it be one shock too many that drives us into another recession?

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why the Recession Calls?

Financial FAQs

The Conference Board’s Index of Leading Economic Indicators (LEI), a read on actual economic data rather than an opinion survey as its Conference Board’s Consumer Confidence Index, has called a recession. Its Confidence Index is hinting at the same.

conferenceboard.org

“Besides persistently weak manufacturing new orders and consumer expectation indicators, labor market developments also weighed on the Index with an increase in unemployment claims and a decline in average weekly hours in manufacturing. Overall, the LEI suggests that economic activity will continue to slow.” Conference Board

 Is that really a surprise? President is attempting to bring back a Gilded Age that prevailed in 1900 by steering as much business to his oligarchs and himself as possible by deregulating while slashing government programs that protect all Americans, and rounding up working immigrants that has badly hurt the job market.

The LEI forecasts business activity six months ahead has been forecasting a possible recession for some time, but now says it is here.

Why? “Its widespread weakness among the LEI’s components and a negative growth rate over the past six months triggered the recession signal in August,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.

The graph shows where its LEI components dropped below the horizontal red line at the start of past recessions. The blue line of the LEI graph shows the two recoveries since the 2001 and 2008-09 recessions and its current low in August (gray bars are recessions).

Consumers weren’t much happier in the confidence survey. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—decreased by 1.2 points to 74.8. Expectations remained below the threshold of 80 that typically signals a recession ahead, said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. .

The LEI is nowhere near past recessionary lows, per the graph, and stock indexes are at record highs. Then why does its LEI keep predicting an incipient recession?

It partly because consumers’ appraisal of current job availability declined for the eighth consecutive month in the survey, and it is the most heavily weighted LEI component. We now know what consumers must have already been intuiting. There were -991,000 fewer jobs created over the past year and one half in the Labor Department’s just released benchmark revision.

Chairman Powell has been hinting of late that the Fed has no good choices in deciding whether to ease credit conditions by cutting interest rates or not, because the job market is deteriorating and inflation has been rising since April 2 when Trump first announced his tariff war on the world.

The September rate cut of -0.25% was the first since last December and Powell said there will probably be two more cuts by the end of the year to support more job creation.

Why the job weakness? There were just 22,000 hires and the unemployment rate rose to 4.3% in August. The hires were in the Leisure/Hospitality, Education and Health sectors. Manufacturing, Construction, Professional Services and Government (state and local included) lost jobs. And initial jobless claims for workman’s comp have risen to a three-year high.

And there is widespread weakness among most of the LEI’s components, such as fewer hours worked. Businesses had in effect stopped adding workers, because not knowing what the final tariff rates may be. This is enough to shake consumers’ confidence in their future.

Add to that the demoralizing effect on hourly wage earners in construction, manufacturing that require manual labor and mostly employ immigrants, the target of the ICE raids.

The financial markets are more focused on how to spend the record profits of big business, hence the hysteria over AI, TikTok, IPOs, and the irrational exuberance that has driven the stock indexes to record highs.

In fact, it’s what is looking increasingly like the last Gilded Age where a small group of the extra-wealthy partied while the US economy as a whole declines.

It can be reversed, of course, if Republicans have enough cajónes to stop Trump from weakening almost every sector of the American economy that creates growth, from consumer and environmental protections, healthcare, to national security (e.g., NATO by alienating our allies).

Consumers are extremely on edge and their behavior determines what happens next, and the poorest largely live in the red states. Republicans will be the most affected.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

 

Second Quarter Growth No Big Deal

 Financial FAQs

“Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2025 (April, May, and June), according to the advance estimate released by the U.S. Bureau of Economic Analysis. In the first quarter, real GDP decreased 0.5 percent.” BEA.gov

BEA.gov

The big jump in second quarter economic growth wasn’t a surprise. Consumers continued to shop but bought fewer imported goods because Trump's tariff wars were already raising prices. Imports are a subtraction in the GDP equation.

It might be a one time jump because consumers are saving more and buying less these days, as I’ve been saying, while waiting to see how much damage the Trump tax cuts and higher tariffs might wreak on the U.S. economy, especially to those it will harm the most.

The two-month GDP average was a 1.3% growth rate. The U.S. economy expanded at a 2.8% rate in 2024 and 2.9% in 2023 under President Biden, which was in large part because of the New Deal legislation that pumped $billions into economic growth and caused higher inflation.

The Fed then raised their interest rates to bring inflation back down to its present mid-2% range, and Republicans took over the congress. The result was Trump initiated his tariff wars and passage of the big beautiful big tax bill that will increase the federal debt by some $4 trillion.

But because at least some of the additional federal debt must be paid for to preserve the no longer great faith and credit of our economy, Trump has raised tariff rates to 15-20 percent, which means raising taxes on U.S. consumers and businesses.

And as any economist will tell you, taxes slow economic growth, regardless of what Trump and his cabinet cronies say. And our economy is slowing. The so-called final sales of consumers and businesses increased just 1.2 % in Q2, and there is no indication that it might pick up as the tariff agreements (i.e., taxes) are finalized.

Inflation has declined because of less spending. Consumers spending as measured by the personal consumption expenditures (PCE) price index in the Q2 GDP report increased just 2.1 percent, compared with an increase of 3.7 percent. Excluding food and energy prices, the PCE price index increased 2.5 percent, compared with an increase of 3.5 percent because consumers bought ahead of the price increases due to the April 2 tariff announcements.

What about those Federal Reserve interest rate cuts that Trump wants? Fed Chair Powell said at his latest press conference after the July FOMC meet that its twin mandates of price stability and maximum growth are still in balance, so there’s no reason to lower interest rates at this time.

The unemployment rate remains stuck at 4.1-4.2 percent because the mandates are in balance. Powell said the Fed would act to lower interest rates sooner—i.e., ease credit conditions--if the unemployment rate were to increase substantially.

The Trump administration’s agenda paints a sordid picture in following a very similar trajectory of the GW Bush administration—with its wars on terror (like Trump’s tariff wars), huge tax cuts for the wealthiest and less regulation (like Trump’s big beautiful bill) fueling what became the Great Recession.

Trump’s tariffs won’t help the very people in the red states that elected him but raise their prices. His cuts to social services harm those in red states in the most need. His DOGE cuts are not only endangering air travel, but disaster relief when the worst storms are also happening in mainly red state territories.

So, its not even the blue states that Trump wants most to harm, but his own MAGA supporters that will suffer the most. It’s what bullies do, prey on the weakest and most vulnerable, especially immigrants and minorities that are least able to protect themselves.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What's the Fed Saying?

 The Mortgage Corner

“In considering the outlook for monetary policy, participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity.” FOMC

Photo: Andrew Harnik/Getty Images MarketWatch

The Federal Reserve’s release of its minutes from the last FOMC meeting didn’t have much to say about the continuing tariff wars, because nothing has yet been negotiated—just some retaliatory pauses and a written understanding with the UK.

And it may take a while—could be months and years before actual trade agreements are agreed upon as they must pass congressional approval as well. The NAFTA North American Free Trade Agreement wasn’t agreed upon until 1992, though negotiations began in the late 1980s.

That puts the Fed in a very difficult position. We now know why President Trump has attempted to disguise the fact that it is an import tax. The Court of International Trade has ruled that Trump’s retaliatory tariffs are illegal.

The trade court ruled for a group of small businesses and Democratic-led states in finding that Trump tried to get around congressional approval by invoking a 1977 law that doesn’t mention tariffs.

It’s a separation of powers issue that will be fought in the courts, and may take some time, in other words.

Hence Chairman Powell’s concern that a recession may be on the horizon. “The staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast.”

Why? Because higher taxes generally cause higher inflation, which trump denies will happen (it was a campaign promise), and Powell, et.al., have worked hard to get inflation down to its current level.

BEA.gov

So it was good news that the just released Employment Cost Index rose just 2.1 percent in April; the core rate up 2.6 percent without auto and gas prices figured in. But the personal savings rate (black line in BEA graph) has been rising steadily, is up to 4.9 percent from its December low of 3.8 percent, which is a sign that consumers are becoming more cautious.

We already have a decline in two of the four major components that have determined past recessions: declining employment and flat industrial production because the tariff wars are slowing supply chains. The unemployment rate has risen from 3.6 percent in 2022 to 4.2 percent in April and long-term jobless compensation claims have been steadily rising.

The two other main indicators of a recession are consumer spending that has slowed to 1.2 percent from its usual 3-4 percent annual growth, and GDP growth that went negative -0.2 percent in Q1 for the first time since the COVID-19 pandemic.

So we could already be in a recession, and the tariff wars will certainly cause even more uncertainty.

The real problem is that Trump is trying to get around the legal process with what he asserts are emergency powers to stem the flow of fentanyl and lower the trade imbalances. Only Congress has the power to tax, not the Executive Branch, unless there’s a real emergency. Historical trade imbalances and fentanyl imports aren’t considered national emergencies that require making enemies of our closest allies.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

When Will Housing Recover--Part II

 The Mortgage Corner

Federal Reserve Chair Powell has said the Fed is about to cut interest rates, so I’ve been wondering if the housing industry can come out of its self-made recession?

One good sign is that existing-home sales ticked up for the first time in July, after falling steadily since the recent annual rate high of 4.4 million in February 2024.

The NAR said, “Total existing-home sales^[1] – completed transactions that include single-family homes, townhomes, condominiums and co-ops – ascended 1.3% from June to a seasonally adjusted annual rate of 3.95 million in July.” (But) Year-over-year, sales fell 2.5% (down from 4.05 million in July 2023), so that’s not much of an improvement.

This could be the beginning of an upward trend in overall sales, but the question now is not so much about mortgage rates, which will help sales and affordability, but an adequate housing supply to get sales back to the 4-5 million sales that prevailed in decades past and kept a much higher supply of for sale housing on the market.

Cutting interest rates is a start but the building industry for various reasons has been reluctant to build enough new homes for decades—ever since the Great Recession of 2008-09 and busted housing bubble.

This is just one of the ways Americans have been paying for the excesses of the Great Recession since then. The housing shortage may be its most pernicious result.

Calculated Risk

Calculated Risk’s graph of existing sales portrays the damage done by the Great Recession (middle gray bar in graph). Sales had reached a 7 million annual rate in 2005 at the height of the housing bubble, then plunged to 4 million units during the Great Recession and slowly rose to more than 5 million units annually until the COVID-19 pandemic.

More than one million excess units were built during the bubble, as Greenspan’s Federal Reserve attempted to goose sales any way they could to stimulate slowing economic growth while the Bush administration was fighting the Iraq and Afghanistan wars on terror.

The housing supply should be improving in anticipation of the Fed’s rate cuts that would bring down the cost of everything that goes into building new homes.

Sales of newly built homes in the U.S. just increased 10.6% in July to an annual rate of 739,000, up from a revised 668,000 in the prior month, the Commerce Department reported Friday. It was the highest sales rate in more than one year.

For-sale inventories have also edged up some 40 percent this year, as existing homeowners now see a chance to either move to a smaller unit, or into a retirement home now that mortgage rates are declining..

We still have a housing shortage of somewhere between 1-3 million residential dwellings, including owner-occupied and rental units, without considering housing for the homeless.

Another culprit of the housing shortage has been lenders that have become more conservative since the housing bubble. A credit score of 680 was acceptable to Fannie and Freddie for their best conventional mortgage rates prior to the Great Recession, whereas it is above 720 today, which means fewer home buyers are eligible for good loans.

It is really the Fed’s job to require banks to ease their credit standards in this case. Its inaction has only made matters worse for homebuyers (and therefore renters) with the housing shortage.

Now that Chairman Powell just announced that rate cuts are in the works—probably to begin at the Fed’s September FOMC meeting—they should use some of the other tools within their powers—such as requiring more affordable loan programs for entry-level homebuyers, as well as easing banks’ credit standards.

"The time has come for policy to adjust. The direction of travel is clear," Powell said in his speech to the central bank's summer retreat in Jackson Hole.

Let’s see if Powell means what he says and the Fed really wants to help cure the housing shortage.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

U.S. Economy Has Landed

 Popular Economics Weekly

GETTY

It’s about time. Fed Chairman Powell has finally admitted in so many words that the U.S. economy has made a ‘soft landing’; economists’ term for inflation to have declined sufficiently that the Fed can begin to ease credit conditions by cutting their interest rates.

This will give a boost to the manufacturing sector that has been in recession, and many other sectors as well. It will most of all aid those consumers who had to borrow heavily just to maintain their lifestyle, and whose savings are exhausted. Most of all, it will avoid a recession that had probably begun in the housing and manufacturing industriesvisio.

"The time has come for policy to adjust. The direction of travel is clear," Powell said in a speech to the central bank's summer retreat in Jackson Hole. "The timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks," he said.

Even more importantly, he said, we will do “everything we can to support a strong labor market.” That was a huge admission that rising wages and excessive consumer demand wasn’t the inflation culprit. It was the pandemic-induced shutdown that made everything more expensive.

What must have added urgency to his announcement was the Bureau of Labor Statistics downward revision of one year’s job formations by -818,000 nonfarm payroll jobs from March 2023 to March 2024. It turns out the labor market wasn’t as strong as originally thought.

It was mostly in the service sector, which had created the most jobs to date—professional and business services, where employment was revised down by 358,000 during the period. Leisure & hospitality had the second-largest downward revision of 150,000.

FREDpce

This is while the Federal Reserve’s preferred Personal Consumption Expenditure (PCE) inflation measure has remained at 2.5 percent ever since January 2024.

I have opined in past columns that inflation won’t go much lower, as long as we have decent economic growth. If prices do in fact turn negative, which is the meaning of deflation, then we will have a recession.

That is as good a definition of recession. One sees this clearly in the FRED graph above where PCE inflation dipped sharply at the 2020 recession (gray bar) and has fallen in every other recession since 1960.

There is little to fear from such an event at the moment, since predictions for third quarter economic growth are in the 2% range. Both the Atlanta Fed and New York Fed’s GDPNow estimates have dropped to 2%, because there is little investment in the housing market due the high cost of money. But that could change and boost third quarter growth with the Fed’s rate cuts.

The 30-year conventional fixed mortgage rate has dropped from 7.8% to 6.4% in less than one year. It didn’t impress the National Association of Home Builders, in part because there is still a 7.8-month buildup of new homes for sales.

There was a sudden bump in new-home sales in July, up 11 percent and 5.6 percent in a year because of the lower mortgage rates.

(But) “Despite the monthly bump in new home sales data, higher rates continue to sideline buyers as housing affordability challenges remain,” said Carl Harris, chairman of the National Association of Home Builders (NAHB) and a custom home builder from Wichita, Kan. “The only sustainable way to ease high housing costs is to implement policies that allow builders to construct more attainable, affordable housing.”

The Fed’s decision is huge on many fronts. Stock and bond prices should be able to regain the highs reached before the Fed began to raise interest rates, for starters.

Lower interest rates should also help to cure the housing shortage.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Higher Productivity the Key

 Financial FAQs

There is a major reason the US economy is doing well in so many ways—with plunging inflation, surging consumer spending, and the highest economic growth of developed countries—that is often overlooked in economic reports.

Labor productivity has been surging lately. It is the seed of our present prosperity as well as future growth. Non-supervisory workers are producing more per hour in the last three quarters that at any time since the COVID pandemic.

FREDlaborproductivity

Non-farm labor productivity has soared from a low of -2.4% to +2.7% annually in eighteen months (Q2 2022 to Q4 2023) as portrayed in the above FRED graph.

Why? Most economists say it’s because the US economy has been fully employed for so long—more than two years—that there’s a scarcity of workers, so employers have needed to invest more in capital expenditures—whether its AI or more efficient factories—to meet the demand for their products. This translates to workers being more productive, as they are running the new machines and software services.

Average employee salaries are also higher, and are now rising faster than inflation, which means even more demand for products, thus creating a positive loop. Higher salaried employees spend more, so companies will produce more.

That is why Jame Bullard, former St. Louis Fed President, believes Powell’s Fed Governors need to begin to shrink interest rates sooner rather than later.

Bullard, in an interview with MarketWatch’s Greg Robb, said Powell doesn’t want to wait until inflation is actually at the 2% rate. “That would be the ‘Honey I forgot to shrink the policy rate’.” It is a phrase credited to Chairman Powell, who feared that the Fed would react too slowly to the rapidly plunging inflation rate, causing perhaps a recession.

The Fed’s benchmark rate is now in the range of 5.25%-5.5%. The neutral rate is below 4%. There are only three Fed policy meetings before the third quarter of the year. “The math is not adding up that the [interest rate] is going to be at the right level,” said Bullard.

Another reason for the Fed to move more quickly in dropping rates is that wholesale prices are now falling more quickly due in part to higher productivity.

The Producer Price Index (PPI) for wholesale goods and services continues to plunge. PPI Final Demand is now up just 0.9 percent in 12 months, far below the Fed’s 2 percent target. It jumped 0.6 percent in January but monthly prices declined 0.1 percent in December 2023 and advanced just 0.1 percent in November.

And it is still trending downward. So where is risk of higher inflation down the road if the cost of raw materials is declining? There’s a disconnect in the reasoning of those who see a danger of higher inflation ahead, so let us hope that Powell means what he says and doesn’t forget to shrink the policy rate.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Interest Rates About To Fall?

 Financial FAQs

Fed Chair Jerome Powell was as ambiguous as ever at yesterday’s post-FOMC press conference. He reported the Fed Governors decided no more rate hikes were warranted, but they needed to be more confident that inflation had been tamed before actually cutting their Fed Funds rate.

When asked by several reporters how much confidence was needed, he responded they needed “greater confidence” but couldn’t be pinned down on what that meant.

In fact, Powell’s Fed Governors don’t seem to understand the main cause of post-pandemic inflation. Most economists today attribute it to the worldwide economic shutdown that stopped production, which took years to recover, contributing to the scarcities that scared consumers—remember the toilet paper shortage?

So what caused such a precipitous drop in inflation, the fastest drop in post-WWII history? Supply-chains have recovered, and we are beginning to see a large jump in labor productivity, which is a significant increase in the amount of goods and services produced per worker-hour.

FREDproductivity

I maintain a major reason supply chains have recovered so quickly is the surge in labor productivity that began in the first quarter of 2023. And why not? There had been a large increase in capital expenditures in the second quarter of 2021 as companies ramped up production after the shutdown.

Capital expenditures, or CAPEX, is the seed-money that increases productivity by investing in new technologies and factories. It fell as per the above FRED graph when the Fed began to raise interest rates, but corporations were able to absorb the interest rate increases as their profits soared and the various PPE and PPI aid money began to filter into the equation.

“Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023, the U.S. Bureau of Labor Statistics reported today, as output increased 3.7 percent and hours worked increased 0.4 percent.”

This is why financial markets are now beginning to push back at Powell’s Fed Governors seeming indecision on when to cut interest rates.

MarketWatch reported that Mohamed El-Erian, chief economic adviser at Allianz, said in a post on X, the social-media platform formerly known as Twitter, Powell’s decision to push back against a March cut “is fueling more questions about the risks of the Fed being late again, albeit in a different direction.”

But the markets like to respond to facts rather than hearsay and we now have a huge revision to the GDPNow growth estimate from the Atlanta Fed that I’ve been following. In fact, GDP growth may be accelerating in 2024.

AtlantaFed

It’s revision said: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 4.2 percent on February 1, up from 3.0 percent on January 26.”

The revision came after this morning’s construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, as well as first-quarter real gross private domestic investment growth—all showed sharp increases.

So, is the large jump in the Q1 GDP forecast too outrageous? Maybe not, because construction spending is soaring from the various government initiatives, such as the Infrastructure and Inflation Reduction Acts, and the Manufacturing ISM report has turned slightly positive after one year of decline.

Spending just on construction projects rose 0.9% in December to $2.1 trillion, the Commerce Department reported Thursday. It has risen every month in 2023. It is what the government and private companies spend on projects, from housing to highways.

And I also reported on the strong Q1 real gross domestic investment (Capex) growth above.

So, what will higher economic growth do to inflation? It hasn’t hurt the inflation decline to date. Why, because so much of the spending that goes into the GDP is on modernizing the US economy, further increasing US labor productivity.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Fed Should Reverse Course

 Financial FAQs

FRED10yr

The wild fluctuations of the 10-year Constant Maturity Treasury yield portrayed in the above St. Louis Fed graph should have alerted Federal Governors and Chairman Powell to the dangers of raising interest rates too quickly.

It is the reason three US banks have failed, who wouldn’t either hedge against or reduce their holdings backed by Treasury securities that lost value as interest rates rose.

It’s also why the Fed should begin to reverse course to lower their overnight rate target that is now at 4.5-4.75 percent.

The decline in confidence of our banking system can in part be attributed to the Fed Governors naiveté, or maybe outright ignorance, of the US banking system they are supposed to regulate.

For instance, Fed Governors did not seem to realize the risk to depositors of banks holding deposits worth more than the $250,000 ceiling set by the FDIC for insured deposits. It was 97 percent in the case of Silicon Valley Bank.

The Fed seems to have been its own worst enemy in not realizing the effect of its policy actions, as evidenced by February’s FOMC minutes.

“With respect to the relationship between monetary policy and financial stability, some participants noted that evidence regarding the link between the policy stance and elevated financial vulnerabilities was limited, with a couple of participants further observing that there were not many episodes of persistently low interest rates.”

Yet Silicon Valley Bank had been on the San Francisco Fed’s watch list for more than one year as the Fed Governors charged ahead with their rate hike policy. “By July 2022,” as reported by the NYTimes, “Silicon Valley Bank was in full supervisory review, and was ultimately rated deficient for governance and controls.”

“In addition,” continued the FOMC minutes, “some past episodes of heightened financial vulnerabilities were associated with excessive risk-taking behavior that did not seem to be very responsive to typical changes in interest rates.”

Really? The NY Times and others have reported on the hands-off attitude of Fed regulators in not doing more to demand that banks—particularly those vulnerable to large uninsured deposits—crack down on such risky behavior.

So the Fed might call a halt to its policy of taming an inflation that is mostly caused by factors outside of the Fed’s control, and focus more on banking supervision that is under its direct control.

A 2022 Gallup survey found that just 27 percent of Americans had a “great deal/quite a lot” of confidence in our banks.

At the very least, the Fed should reverse course and begin to bring down interest rates before more banks fail, and more Americans lose faith in our banking system.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen