Want my latest thoughts on Powell? They’re right HERE in this interview with the TD Ameritrade Network.
Picture the scenario: a major player in the U.S. financial landscape suddenly evaporates and the Fed decides it’s better to put projected interest rate hikes on hold and even loosen up a little until the economy can absorb the shocks.
I’m not talking about Silicon Valley Bank (SIVB) of course. What I’ve just described is what happened almost 25 years ago when a “little” hedge fund called Long-Term Capital Management made the wrong bet and imploded back in 1998.
It’s old news. But it reveals an essential truth behind the Fed’s decisions over time: our central bank is a risk-averse institution. When the landscape shifts, the prevailing instinct is not to simply keep driving.
From Greenspan to Powell, every Fed chair confronted with a potential crisis in the middle of a tightening cycle has hit the brake to ensure that the economy can handle higher interest rates.
Back in 1998, there were hints that LTCM would take the global financial system down with it. Rather than make things worse, the Fed actually softened, cutting rates a few times to provide a cushion.
“Do no harm” was the objective there. And while we wait for the blowback from Silicon Valley bank, the Fed is now closer than ever to at least signaling a pause at the next meeting two weeks from now.
That doesn’t mean they won’t tighten by some token amount. Nobody on Wall Street expects anything less than a quarter-point hike at this point and a half point is still on the table.
But the odds of another big hike in May just got a whole lot lower. And unless Powell threw away the old Fed playbook, additional tightening moves after June are now extremely unlikely.
Meanwhile, the chill radiating out of Silicon Valley will do a lot of the Fed’s work for it. Powell needed to shock the job market and get cash to stop flowing quite so fast through the economy.
A big lender going offline will do that effectively, especially if it was at the center of the “innovation economy.” Startups having trouble with payroll will need to make tough choices. Those affected will gravitate back toward stronger situations even if it means accepting less lavish compensation.
We’ll see how deep this goes. The Fed is watching too.
And never forget: after the 1998 shocks, the S&P 500 soared about another 50% in the following two-year period. The dot-com crash didn’t hit until 2000 . . . when Greenspan was so hot to kill inflation that he pushed rates past their limit.
The thing about the Fed is that while it makes plenty of mistakes, it always learns. It never makes the same mistake twice. Greenspan’s mistake wasn’t pausing the rate cycle when LTCM imploded. It was in refusing to even flinch when it became clear that he was going too far.
No Fed Chair afterward has ever made that mistake. And when Ben Bernanke tried to ignore a failing financial institution in 2008, all hell broke loose. It’s going to be a very long time before the Fed lets another Lehman Brothers moment happen.
Think back to the end of 2018. At the first sign of credit markets freezing over, the Fed flinched. Who was running it at the time? Jay Powell.
Two years later, COVID hit and Powell flinched again. Interest rates dropped all the way back to zero. Whether Silicon Valley Bank turns out to be just another LTCM or another potential Lehman Brothers, history is fairly clear.
Big money in the futures market tells me that for all the tough talk in front of Congress this week, investors don’t think Powell is stupid enough to push his way through a potential fiscal crisis.
And if the recession clock is ticking faster now, the odds now look a lot higher that rates will actually go down after the summer. That’s going to be some measure of comfort, cushion and relief.
We just have to get there first. The future is always a work in progress . . . but we aren’t robots marching haplessly toward a pre-programmed destiny. Over the decades, the only sure thing has been that alert investors are rewarded for accepting these moments of doubt and fear.