Fed Staff Saw Recession From Bank Stress, Minutes Reveal
The word "recession" came up three times in the March FOMC minutes, all in the staff economic outlook section.
"Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year," the account of last month's gathering, released on Wednesday, said.
In a scenario where the banking stress didn't abate quickly and then deteriorated "more than assumed," staf
They Fed is now expecting a recession, their own GDP projections for the remainder of 2023 require negative growth in H2 and now their own research staff is stating the obvious about the effects of the banking mini crisis. Hiking one more time in May increases the odds they’ll have to cut this year, wouldn’t that be worst for Fed credibility? The Fed should show some confidence on the impact of their actions so far, another hike would likely do more damage than good at this stage.
The Fed’s base case is a mild recession this year, with the possibility of a severe recession, and yet the FOMC raised rates last month.
We should disabuse ourselves of the notion that “the Fed won’t do X to fight inflation because it will cause a recession” because it is wrong.
The alternative “the Fed shouldn’t do X because it will cause a recession” is not useful.
The remaining possibility that has the chance of being both right and useful, is “the Fed won’t do X to fight inflation because it will cause a severe recession”.
I think best to turn attention to the severity of the coming recession, not how the Fed can avoid any recession.
Question: Post-SVB, hasn’t every bank with an interest-rate mismatch by now hedged their exposure to elevated rates? Hope so. My prediction: FOMC will hike .25bps in May and then pause, with language to the effect that if disinflationary trends start to reverse, they’ll be back in the hiking game. I’d like to see the Fed adopt a “loose” Taylor rule, with rates ~200bps above core until the latter is below 3% and headed lower.
I briefly looked into bank hedging.
The impression I got is that if you hedge HFM, the unrealized G/L on the hedge flows to earnings while the unrealized G/L on the HFM does not.
Also the cost of the hedge may eliminate the meager income on the HFM, further impacting earnings.
I’m not at all sure of that, but there must be a reason why banks don’t routinely hedge HFM.