Lame Ducks and Red Tape

Investment Insights: Market Update
  • Today, the Federal Reserve raised its benchmark overnight rate by 25 basis points to a range of 5.00 percent to 5.25 percent.
  • Fed Chair Jerome Powell only hinted that rate hikes were on pause, though quantitative tightening via its balance sheet seems to still be in play.
  • On Monday, First Republic Bank collapsed and was seized by regulators before the majority of its assets were sold to JPMorgan.
  • The US debt-ceiling deadline is just one month away and partisan politics seem to leave little room for compromise.

An uncertain mood has fallen over the financial markets ahead of the Federal Reserve’s rate decision today. Stocks and bond yields fluctuated, and oil prices fell below $70 per barrel as investors prepared for officials to hike rates for the last time in this program. Markets had widely priced in one last rate hike and, as expected, the Fed raised its benchmark overnight rate by 25 basis points, bringing the fed funds rate to a range of 5.00 percent to 5.25 percent. Fed Chair Jerome Powell only hinted that the central bank may pause rate hikes going forward, but the Fed will likely continue with quantitative tightening by letting bonds roll off its balance sheet at a rate of $95 billion per month. Each hike may take almost a year to work its way into the financial system, so we won’t feel the full effects of the Fed’s hawkish actions for some time. While inflation numbers seem to be tempering amid tighter policy, other parts of the US economy—particularly the banking sector—are starting to feel the squeeze. Much of the recent market doubt is over the banking sector. Fed critics argue that recent hikes were officials picking between abandoning its fight against inflation and allowing further instability in the banking sector. It seems policymakers decided to continue combatting higher consumer prices. On Monday, after weeks of trying to stay above water, regulators seized First Republic Bank amid growing losses and hemorrhaging deposits. JPMorgan will purchase the San Francisco-based lender for $10.6 billion after other incentives provided by the FDIC. This marks a new second-largest bank failure in US history—behind Washington Mutual in 2008—taking the infamous title from Silicon Valley Bank. However, the issues surrounding First Republic’s failure differ. In this case, failure wasn’t necessarily due to asset management or client demographics. It fell more toward the loss of faith from depositors, but some of the blame is also on the Fed. Its rapid and aggressive rate increases caused havoc in the banking system as lenders became complacent with near-zero interest rates and ultra-accommodative monetary policy. After acquiring First Republic, JPMorgan CEO Jamie Dimon declared, the “crisis is over.” While that may or may not end up being true, calming depositors and staunching outflows is essential to stopping further issues, particularly for smaller and mid-sized banks.

Adding to the disarray, the US national debt ceiling deadline is on the near horizon as the US government could run out of money by June 1. Political disagreements over extending the debt limit hinge on House Republicans leveraging their position to force spending cuts from the Biden administration, with one of the most contentious areas being in veterans’ benefits. Some of the political maneuvering also revolves around House Speaker Kevin McCarthy, as representatives may call for his ouster over the result. The upcoming presidential election seems to have increased political partisanship, and there appears to be little room for compromise. If history is any gauge, officials may wait until the last minute for a short-term fix and kick the can down the road once again.

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Financial market data for various time periods covering global asset classes. Data as of May 2, 2023.

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[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
Chief Investment Adviser