Bank stocks are still floundering after they took a major hit in March of this year, coinciding with the failures of Silicon Valley Bank, First Republic Bank, and Signature Bank.
KRE, a regional banking ETF, is down 27 percent year-to-date, while KBE, an ETF with large banks, is down 16 percent year-to-date. Quarterly earnings will be reported by JPMorgan Chase, Wells Fargo, and Citigroup tomorrow, and a few other big reports are due early next week.
It seems that the Fed’s hikes caught everyone off guard, including the Fed itself. There are hundreds of billions of dollars of mark-to-market losses on banks’ balance sheets, but these losses are unrealized. The Bank Term Funding Program, which was implemented in March, allows banks to use Treasuries and mortgage-backed securities as collateral for loans from the Fed at the assets’ par value, not the dramatically lower market value.
It all adds up to a scary picture with a rosy veneer.
Depositors seem content for now, but it won’t take much for them to become skittish, even in view of the aggressive and unprecedented actions by the Fed and the FDIC in March to make uninsured depositors at the failed banks whole. With mortgage and credit card payments climbing, and the seemingly inexorable price inflation eating away at household budgets, we will surely see a reckoning soon.
Speaking of price inflation, the “long” part of Paul Krugman’s “Team Long Transitory” is becoming longer. The most recent monthly CPI figure indicates a 4.7 percent continuously compounded annual rate of change, higher than the widely reported 3.7 percent year-over-year change. Both methods of calculation give a figure well above Jerome Powell’s stated goal of two percent.
It is this element that is throwing a wrench into everyone’s forecasts. No matter how much “forward guidance” the Fed provides, they are a giant source of uncertainty due to the way that they have frequently surprised markets with unprecedented actions and new powers since 2008.
It is simply too difficult to know how the Fed will respond to the next crisis—not just in a quantitative sense, but in a qualitative and categorical sense. Markets already bet on future Fed funds rates, but there’s no way to anticipate the next power grab. Who could have guessed that the Fed would purchase billions of dollars in mortgages and increase the size of their balance sheet tenfold and push interest rates to zero for years? Who knew that the Fed and the FDIC would insure uninsured deposits and bail out the banking system (for now) with the Bank Term Funding Program?
These unpredictable events and their chaotic outcomes keep markets not on their toes, but their knees. Everything depends on this leviathan central bank. Two things are certain, however: it will grab more power, and it cannot flout economic reality forever.
