Power & Market

Translating Fedspeak

Five days before the last Federal Open Market Committee (FOMC) meeting, Tho Bishop wrote about how the Fed and other agencies are preparing for a crisis without telling everyone they are preparing for a crisis. In his article, he showed how the Fed and the Office of the Comptroller of the Currency were working on a policy that would require banks to access the Fed’s discount window once a year, which would diminish the stigma associated with crawling up to the window as a last-ditch effort to save your failing bank.

This is clearly crisis prep. They see the dominos falling: commercial real estate valuations, credit card delinquencies, regional bank failures last year, the expiration of the Bank Term Funding Program (which was emergency lending without calling it “emergency lending”), high-profile corporate layoff announcements, etc. They are getting ready for their next power grab once the crisis is in full swing.

The minutes from the January FOMC meeting were released today, and they reveal, in Fedspeak, of course, worries about the economy and the banking system.

In the discussion of financial stability, participants observed that risks to the banking system had receded notably since last spring, though they noted vulnerabilities at some banks that they assessed warranted monitoring. These participants noted potential risks for some banks associated with increased funding costs, significant reliance on uninsured deposits, unrealized losses on assets resulting from the rise in longer-term interest rates, or high CRE exposures.

My translation: “The underlying problems in the banking sector that resulted in the bank failures last year have only been papered over, and not meaningfully resolved. Deposits, commercial real estate loans, and all those assets with unrealized losses you’ve marked as ‘held-to-maturity’ are not safe.”

While participants noted that they were not seeing any signs of liquidity pressures at banks, several participants noted that, as a matter of prudent contingency planning, banks should continue to improve their readiness to use the Federal Reserve's discount window, and that the Federal Reserve should continue to improve the operational efficiency of the window.

My translation: “We are definitely seeing signs of liquidity pressures at banks, so they should get ready to line up at the discount window for a loan of last resort.”

Given that the stresses that emerged at some banks early last year have subsided, members agreed to remove from the statement the reference to the resilience of the U.S. banking system as well as to tighter financial and credit conditions and their effects on the economic outlook.

My translation: “Yeah, we were definitely lying earlier when we said ‘risks to the banking system had receded notably’ and how we aren’t ‘seeing any signs of liquidity pressures at banks.’ We’re just gonna delete the ‘banking system is sound and resilient’ line.”


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