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Drew Angerer
The release of the official Policy Statement and the ensuing press conference following the conclusion of an FOMC meeting is usually quite dull.
The Fed likes to prepare the market in advance for what to expect, as it doesn’t like surprises. And although Fed Chairman Powell answers questions at the press conference, he drones on in a monotone voice and usually provides not much more useful information than you get at a Bill Belichick press briefing.
Yet yesterday’s event, following the first FOMC meeting of 2024, was quite illuminating.
Below are my 5 key takeaways:
1. Fed Removes “The U.S. Banking System is sound and resilient” from the Policy Statement
On March 12, 2023, we all became aware of the regional banking crisis when the Fed and the FDIC stepped in to take over Silicon Valley Bank and Signature Bank. Markets were in a panic about the safety of banks.
A mere 10 days later, following the March FOMC meeting, the Fed inserted in their Policy Statement for the first time that, “the Banking System is sound and resilient.” For the next six FOMC Policy Statements, the second paragraph contained the exact same language.
Until yesterday, when that language was removed from the Policy Statement.
The Fed is very thoughtful and deliberate with their public comments, so the question has to be asked, why was this language removed now?
Perhaps, not so coincidentally, it was because Wednesday morning, only a few hours before the Fed press conference, New York Community Bank released their earnings for 2023 and shocked the market.
New York Community Bank had taken over the failed Signature Bank in March 2023, with substantial assistance from the Fed and the FDIC. When they reported their earnings, they announced a 70% cut in their dividend, to $0.05 per share, as well as a massive $552 million increase in their loan loss provision. In addition, they reported a $252 million loss for the 4th quarter.
Their stock took a big hit, falling -38% on the day, with another -12% decline the next day.
The announcement caused concern to ripple through the banking market.
The KBW Regional Bank Index, is down -12.7% YTD, and is back to the level it was at on March 12, 2023, when all the banking troubles began.
The stated problems for New York Community Bank, as well as other banks, stem from their commercial real estate portfolios.
Perhaps the Fed sees more problems with banks.
At the press conference, despite having access to the Fed Statement for 30 minutes before Chairman Powell spoke, not one reporter, of the twenty who posed questions, asked him about the removal of “Banking is sound and resilient”
For a detailed analysis of banking, please see my recent Seeking Alpha Article “The Looming Trouble In The Banking Industry.” https://seekingalpha.com/article/4657447-looming-trouble-banking-industry
2. Fed Takes March Rate Cut Off The Table
Since Chairman Powell had hinted in December that rate cuts were coming, the market was eager to learn more about the timing. Although most expected that the Fed would continue with the pause in January, many were anticipating a cut as soon as the March meeting.
Of the twenty questions asked of Chairman Powell, most were on this topic. After deflecting as much as he could, and sticking to the Policy Statement that the Fed would not reduce rates until they had “gained greater confidence that inflation was moving sustainably to 2%” he surprisingly went off script and said that a cut in March was not in their base case.
This caught many off-guard.
Powell’s overall tone was more hawkish than expected.
3. The Fed Will Address the Balance Sheet Run-off at the March FOMC Meeting
Two of the 20 questions asked had to do with the status of Quantitative tightening. Chairman Powell first expressed that he thought that the balance sheet run-off has been progressing quite well. He also stated that he felt it was about time to discuss the pace of the run-off, and it was decided that this will be a focus of the next FOMC meeting in March. He felt the Fed was at the beginning of the process.
4. Cutting the Fed Funds Rate and Continuing With Quantitative Tightening Are Independent Tools
To me, the most striking statement that Chairman Powell made was that he viewed cutting rates and continuing with the balance sheet run-off, as independent tools. As such, he saw no inconsistency with executing both at the same time. He viewed them both as Policy Normalization.
His quote was, “you could say that we’re loosening and tightening.”
I believe this statement, that the Fed will be executing Monetary Policy Easing by cutting the Fed Funds rate, and executing Monetary Policy Tightening through continuing the QT policy of balance sheet run-off, simultaneously, will get a lot more attention in the coming months.
5. No Mention of the Fed’s -$114 billion Operating Loss for 2023
The final surprising development, to me, was that the Fed and Chairman Powell did not address the Fed’s recently released operating results, where they reported a loss of -$114 billion for 2023. Not only did Chairman Powell not bring it up, none of the financial reporters asked him a question about it.
Evidently, neither the Fed nor the press think losing -$114 billion is important. I wonder what the taxpayers think.