Jay Powell has another problem now: Morning Brief

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Friday, March 10, 2023

Today’s newsletter is from Myles Abroad, head of news at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn. Read this and other market news wherever you are with the Yahoo Finance app.

Over the past year, the Federal Reserve has attempted to achieve one goal, using only one tool: to reduce inflation by raising interest rates.

As a result, benchmark interest rates increased by 4.5% year-on-year and headline inflation fell from a peak of 9.1% in June to 6.4% in January. As Fed Chairman Jerome Powell reiterated in his testimony on Capitol Hill this week, there is still work to be done for the Fed to achieve its goal.

But over the past week, acute challenges at two banks have surfaced, another problem Fed Powell now faces. And that is the stability of the financial system.

On Wednesday, Silvergate Capital (SI), which had become one of the biggest banking partners in the crypto industry, announced that it would liquidate and end operations after suffering large deposit outflows from its digital asset customers.

On the same day, Silicon Valley Bank (SIVB), the preferred banking partner of the venture capital and startup worlds, announced that it would suffer a loss of $1.8 billion while liquidating its entire portfolio. short-term securities and raising $2.25 billion in fresh capital.

In a letter to investors, CEO Greg Becker assured investors that the bank had “sufficient liquidity” and said it had taken these steps “because we expect interest rates to continue rising, pressures on public and private markets and high levels of cash burn by our clients as they invest in their businesses.”

The information reported Thursday afternoon, Becker told investors on a call, “I would ask everyone to stay calm and support us, just as we have supported you through difficult times.”

Few statements speak to a more discerning audience than those to whom investors are told to remain calm in times of market stress.

On Thursday, US stocks were crushed in a steady and relentless selloff centered on the financial sector. Regional banks have been hammered. The big banks have been hammered. The S&P 500 fell 1.8%. Bitcoin fell 7%.

The challenge for Powell, however, is that some of the stress Silicon Valley Bank is facing has been induced by the Fed’s actions to fight inflation. And the fear is that they are not alone.

Simply put, Silicon Valley Bank cashed in nearly $2 billion by selling bonds at a loss to buy different bonds with higher yields. The company’s latest annual report showed that the bank held about $14 billion in Treasury securities with an average maturity of between 1 and 5 years. Today, 1-year Treasury bills are yielding 5.25%.

A one-day stock market decline, of course, is no cause for concern for the financial system. Even the liquidation of one bank and deep investor concerns about another do not necessarily have to be Fed-level concerns about the US banking system.

But these measures serve as a reminder that while the role of the central bank in raising or lowering interest rates has become the focal point of investor attention over the past decade, the Fed also plays a central role in stabilizing markets and easing investor fears during uncertain times like the giveaway.

Almost exactly three years ago, Powell hosted an emergency call on Sunday evening March 15, 2020 to announce a series of measures to support the economy as the pandemic rapidly brought world trade to a halt.

On that call, Powell reminded the assembled press: “(That) central banks were originally designed to…provide liquidity to struggling financial systems, so we take that job very seriously. “Probably the most important thing we do now is that.”

Federal Reserve Chairman Jerome H. Powell testifies before a House financial services hearing

Federal Reserve Chairman Jerome H. Powell testifies before a House Financial Services hearing on the “Federal Reserve’s Semi-Annual Monetary Policy Report” on Capitol Hill in Washington, United States, March 8, 2023 REUTERS/Kevin Lamarque

Growing anxiety in the banking system as the repercussions of a 2022 crypto meltdown and the icing of a hot venture capital market pale in comparison to the financial emergency the Fed faced three years ago years. But their actions then served as a reminder of the power of the central bank and, indeed, its centrality in financial markets.

When the February jobs report comes out on Friday morning, investors will be digging into the data to decipher whether a 0.25% or 0.50% rate hike by the Fed is likely warranted on March 22.

This is the moment markets have been heading towards for weeks.

But the unforeseen stress now being injected into the banking system makes Friday and the days ahead remarkable for the Fed in a whole different way.

This presents Jay Powell with another difficulty in the challenge of trying to put some order in an economy that has burst and exploded in a matter of months.

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