The purpose of this post is to merely share what has taken place this week during "the most important Fed meeting ever". Powell gave a fairly dovish outlook and more or less did what we expected which was to confirm the market expectations (25 bps hike) and lay out more dovish possibilities moving forward. This aligns with our expectation for A) pause coming, B) officially RAISE the inflation target, C) create expectations for cuts, and D) implement YCC/QE.
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Later in the early evening of "Fed Day", Treasury Secretary Yellen responded to a query by stating the Treasury did NOT expect to offer any additional support or guarantee of deposits. What???? A few days prior they stepped in to do just that - assure us that all is well and they will in effect bailout all depositors. Now Yellen says the opposite? What is going on here?
If you recall - a few days prior the regional banks and their lobbyists went full speed ahead demanding a 2 year guarantee of all deposits. This flip flop from Yellen, at least relative to the SVB event, brought out calls from billionaires such as Bill Ackman about how Yellen's words will initiate another bank run. We tend to agree though that does not mean we like or support someone like Ackman who is only looking out for his own interests.
Did the Treasury Secretary tell you not to expect any type of protection for deposits and to act accordingly? You decide.
Let's look at one of the main issues here folks. There are about $18 Trillion in bank deposits in the U.S. The FDIC insurance fund has about $158 Billion. There is no "there" there sorry to inform you. If everyone tried to withdraw "their" money at the same time, it would not be possible. Your deposits are an unsecured loan to a 3rd party that is empowered by the current law to execute a "Bail In" if need be and replace your cash with equity in a failing institution.
If the Fed was that concerned with deposit flight, then they would have CUT massively the Fed Funds Rate. Here's why. Deposit flight is also a function of chasing yield. If CDs are giving folks 4%ish, then the backstop bailout guarantees alone don't change the incentive of moving cash from a checking/savings account to a CD or money market. The most immediate and aggressive way to stop deposit flight would be a massive cut to the FFR which in turn would cause the 2yr note to soar in value and hammer short term yields down.
But, they did not do that, and immediately after not doing that the Treasury Secretary said to not expect any support for deposits.
What is going on here?
