Morning Report: Janet Yellen soothes the banking system

Vital Statistics:

S&P futures4,018 35.5
Oil (WTI)68.60 0.90
10 year government bond yield 3.58%
30 year fixed rate mortgage 6.46%

Stocks are higher this morning on speculation that First Republic will get a capital injection. Bonds and MBS are down.

First Republic might get a capital injection. The Wall Street Journal reported that the consortium of banks that deposited $30 billion at the troubled bank are looking at converting those deposits into a capital infusion. The news (along with the Credit Suisse merger) has improved sentiment in all of the regional banks, including Western Alliance, PacWest and US Bank.

Janet Yellen is speaking at a banking conference today and is expected to reassure bankers that the Treasury is ready to protect depositors in the event of a system-wide bank run. The punch line is she will tell the American Bankers Association that the US banking system is “sound” and the situation is “stabilizing.” Additional measures to protect depositors “could be warranted.” “The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. Aggregate deposit outflows from regional banks have stabilized.”

That is good news, but ultimately deposit rates are low and people have better options with their money. Banks can either stand pat and watch deposits run away of raise rates and watch net interest margins collapse. Pick your poison.

The FOMC starts its two day meeting today. The Fed Funds futures are forecasting a 80% chance of a 25 basis point hike. Overall, the Fed Funds futures are getting more hawkish as the market bets the banking crisis is over. That might be wishful thinking, but so far the markets are in a risk-on move.

Borrowings at the Federal Home Loan Bank increased by $304 billion last week, while borrowings at the Fed’s discount window increased to $150 billion. It is amazing how close to the bad old days of the 2008 crisis we are. That said, the 2008 crisis was a sea change in how accessing the discount window was perceived. Prior to 2008, accessing the discount window was considered to be an act of desperation, and a bank’s Board of Directors would think long and hard about accessing those funds. It was a signal to the markets that things were unraveling and most bank executives would avoid doing that like the plague. In 2008, we had a slew of investment banks convert to commercial banks in order to gain access and the stigma is now gone. History will judge whether that was a good thing or not.

The dot plot will probably matter way more than whether the Fed hikes 25 basis points or not. The markets see the Fed cutting rates this year, and if the dot plot doesn’t confirm that I think we could see a major sell-off in stocks and bonds.

17 Responses

  1. Another reason why Cornyn is a douche.


  2. Brent, apparently Dimon didn’t learn anything from the first time around:

    “JPMorgan CEO Jamie Dimon Leading Efforts to Craft New First Republic Bank Rescue Plan

    Big-bank leaders are discussing a capital infusion in troubled lender”


  3. I’m shocked this was the result:


  4. I agree and have been saying this for a while.


    • I was listening to an econ lecture about monetary policy from 50 years ago. It was interesting that they talked about what you do differently in a wartime economy versus a peacetime economy.

      Those terms seem so quaint now.


  5. Does anybody else here agree with me that our involvement in Ukraine is about funneling money to the defense industry?


    • No, the democrats are run by emotion these days. The left thinks Trump and Russia are linked, so going after Russia equals going after Trump. There is no more depth to it than that.

      the democrats are nothing but hyperactive teenage girls.


      • That and the Ukrainians fit the “victim” narrative that drives the media. But that’s been the case going back to the British Empire and how they decided to intervene in various countries, often driven by their own media. Even Adam Smith noted it.


    • McWing:

      Does anybody else here agree with me that our involvement in Ukraine is about funneling money to the defense industry?

      I am open to the idea. How much of the money we have spent in Ukraine has ended up in the defense industry?


    • I think there are mutually reinforcing motives between the Democratic base (Get Trump/Russia!) and the Blob. The money helps keep everyone on the same team when they were adversarial during the Bush wars and even to some extent during the Obama wars.

      Now, it’s about saving Democracy at home and abroad. See also the number of people from the CIA, FBI, etc. working as contributors at CNN, etc.

      Noam Chomsky’s “Manufacturing Consent” is still relevant.


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