April 10, 2023
When the Federal Reserve enters an interest rate hiking cycle, it’s said the bank continues until something breaks. Well, in the Fed’s quest to tame inflation through rate increases, something might have broken with banks.
Last year was a tough one economically and for investors. This year started out better, but then the Fed began to battle inflation, and everything got whacked. Many have warned of potential collateral damage (me included), but it’s fallen on deaf decision-making ears.
Look, battling inflation is fine if it recognizes what higher interest rates do to the economy, markets, the banking system, real estate, pensions, retirement accounts, and so on. But the Fed has seemingly been blind to these ripple effects. The central bank’s focus has been on inflation, and it looks like that approach has been a mistake.
Multiple banks have failed so far, including Silvergate Bank, Signature Bank, and Silicon Valley Bank. These downfalls were followed by fears concerning Credit Suisse bank after many large European and American banks cut off credit lines and people became scared. But the Swiss government orchestrated a takeover by UBS, offering a key lifeline.
All in all, it seems like some banks are broken. And the collateral damage is clear.
For instance, not long ago the average daily rate for a 30-year fixed rate mortgage hit a 52-week high of 7.18%. Also, U.S. credit card debt is at an all-time high, with interest rates on those cards increasing 4% from a year ago. Plus, Bank of America’s prime rate was 7.75% recently.
With all this going on, inflation still isn’t under control – at least as much as the Fed wants (the goal is 2% average annual inflation). Actions have consequences and I’m not sure the Fed took that into account.