The Fed Partners with SVB to Tame Inflation

By Ben Dolan

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Wednesday afternoon concluded the most anticipated meeting by the Federal Reserve since Jerome Powell and the FOMC began raising rates in March of 2022. In the face of severe apprehension about the financial system following the lightening-fast failure of Silicon Valley Bank (SVB) and subsequent turmoil at Signature Bank, the Fed raised the fed funds target rate by 25 basis points, setting the upper limit of the range to 5%.

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Prognosticators couldn’t find a consensus prior to the meeting. Many were betting on a pause, others were forecasting a cut, while some concluded (correctly) that the fed would raise rates to varying degrees. Powell received numerous questions about the health of the financial system during the meeting (and left most journalists with more questions than answers) but steered the conversation toward inflation. In February, as reported by the Bureau of Labor Statistics, the Consumer Price Index rose .4%, seasonally adjusted, versus the prior month, and 6% for the prior 12 months, not seasonally adjusted.

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Still caught off-guard by inflation initially described as transitory, the Fed is attempting to meet one of its two core mandates: stable prices (inflation target of 2%). In explaining the 25 basis point rise in the target rate, Chairman Powell stated that the failure of SVB and concerns about the baking industry generally are likely to tighten lending standards and slow the economy, providing the Fed with some help. Hard to know for sure, but he may be correct (or perhaps the government is incentivizing more risk by backing depositors?).

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What is known for sure, as reported by the AP and various other outlets, is that the Fed lent $300 billion using emergency powers to a number of banks, $146 billion of which went to SVB and Signature Bank to ensure depositors are made whole. Right or wrong, the federal government seems intent on ensuring all depositors of any amount are insured at institutions they deem to be a systemic risk to the financial system.  

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While it’s hard to say whether contagion has subsided (all banks are taking a close look at their balance sheet with regulators looking over their shoulders), the flight to safety has begun. According to Marketwatch.com, yields on the US Treasury 2-year note slipped from 4.8% one month ago to 3.7% today. One-month t-bills have seen a similar decline.

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As always, we’re keeping an eye on this while maintaining our focus on core investing principles of a belief in the power of markets, broad diversification, and controlling costs. Markets incorporate information incredibly quickly (as seen the past few weeks), and we continue to believe in their efficacy through time.