Federal Reserve officials began a two-day meeting Tuesday to decide on a path forward for competing economic issues. On the one hand, there is persistent inflation, threatening to run away with the economy. But, on the other, there is serious worry about the stability of banking, thanks to the recent failure of three banks in as many days.
The stability of the banking sector adds a new layer of complexity to the Fed’s behind-closed-doors debates, particularly given the role higher interest rates played in the recent bank failures.
Dramatically higher interest rates of today have devalued the treasuries of yesterday. Banks are generally encouraged to buy U.S. treasuries to backstop deposits while generating a little income.
But when the Signature, Silicon Valley and Silvergate banks had to sell some of their devalued treasuries at a loss to meet customer withdrawals, that triggered panic and a classic bank run — albeit at much higher speed, thanks to technology like Twitter and electronic banking.
Now the Fed faces a narrow passage between bank stability on one side and high inflation on the other. It’s anyone’s guess what the Fed can do to balance things out without completely breaking the economy.
“They have to try to balance a little bit what’s happening to make sure that people are confident in the economy, especially with those three banks that are out there,” Wyoming Bankers Association President and CEO Scott Meier told Cowboy State Daily. “But I think for the most part, they still realize that there is an inflation problem, and it’s not going away.”
D.C. Writes The Playbook
Meier has been to Washington, D.C., recently, and said the current situation with the economy and interest rates was a topic of discussion.
“I’ve questioned the powers that be if they think they’re going to fix inflation by breaking the back sort of, of labor, and I think they are,” Meier said. “I think that’s exactly what they’re going to do until there’s higher unemployment and things are getting squeezed down a little more.
“Inflation is going to be there, and they’re going to keep moving those interest rates (upward).”
Lifting interest rates pumps up the cost of borrowing, which tends to force businesses and consumers to spend less, cooling demand.
The ripple effect of tamping down consumption reduces the demand for workers. That in turn helps take the steam out of wage increases and, consequently, price increases.
The Federal Reserve has said it’s aiming for around 4% unemployment to cool the demand for labor and tame the runaway inflation train.
But with unemployment rates hovering around 3%, that will translate to putting millions of people who now have jobs out of work.
The only other thing that could lower the demand curve is a new source of workers, such as through immigration. That’s politically problematic, though, and not likely to happen any time soon.
Meier Expects A Smaller Rate Hike
One thing the Federal Reserve could do is slow the rate of its interest rate hikes. This would meet market expectations of a higher rate, while backing off a little on the banking stability question.
This is a middle-of-the-road approach, one that Meier expects the Fed to take.
“So, I do think at this point they’re going to move it up a quarter of a point,” Meier said. “At one point in time they were certainly talking about moving up a half point.”
But what Meier wishes would happen is for the rate of government spending to slow down.
“I think the biggest thing they could do is just stop spending money,” he said. “They’ve got to quit flooding the economy with this stuff. You look at it and you say, ‘Gee, it’s going to take me a wagonload of money just to buy a loaf of bread.’”
That’s happened to other economies throughout history that tried solving economic problems by printing money, Meier said.
“Quantitative easing” is Fed speak for introducing new money into the economy from a central bank.
Quantitative tightening, meanwhile, is its opposite, taking dollars out of the economy.
“You look at that and say, ‘Why are we trying to do this?’” Meier said. “‘Well, we think we can manage it better.’ I’m not so sure.”
Something To Be Said For Taking A Beat
Other economists, however, are not so sure the Fed won’t pause the interest rate hikes, even if just temporarily.
Among them is Wenlin Liu, chief economist for Wyoming. He thinks the Fed could take a one-month pause to just let things catch up.
With the almost “nervous condition” of the economy and serious concerns for banks — particularly small regional banks — Liu suggested the economy could use that right now, particularly given that taming inflation by raising interest rates is not likely to be done quickly.
“(Inflation) is responding to the high interest rate, but much slower than people expected,” Liu said. “The labor market is so strong. Unemployment rates are close to the lowest in 50 years.”
A temporary pause for a month would not seriously undermine the effort tame inflation, Liu said.
“Give a little bit of time,” Liu said. “The purpose is to calm down people’s concern. Then I think they will probably resume (interest rate hikes) next month.”
Wyoming Banks Remain Stable
Meier has continued communicating with smaller regional banks in Wyoming about the situation and believes that they will not be hurt by a quarter percent hike in interest rates, if that is what the Fed decides to do.
“I’m very convinced that Wyoming banks are strong, and safe, and secure,” he said. “Since (Monday) I’ve talked with a dozen or so bankers around the state, and I keep an eye on them.”
Several have had customers call and ask about the state of things, Meier added.
“For us, it’s business as usual,” he said. “I don’t think you have anybody moving big chunks of money from smaller banks to bigger banks.”
About two-thirds of Wyoming deposits fall under the FDIC’s insurance limit of $250,000, Meier said. That gives him even more confidence that a bank run here in the Cowboy State is unlikely.
The remaining one-third is likely made up mostly of municipalities or state governments, Meier suggested.
“So, the individual out there, there’s probably not a lot of them who are uninsured,” he said. “So, I think everybody should be feeling pretty good about Wyoming and its banking.”