Fed hike or pause as hot inflation collides with bank runs?


Yesterday I agreed with Charlie McEliggott at Nomura that the Fed should and would keep hiking at 25bps increments.

It is make or break time for Markets—this Bank “insolvency / liquidity crisis”(see: $89B of FHLB issuance yesterday, as regional banks flooded into low-cost, floating-rate funding in light of deposit outflow crunch)is actually about bank “profitability crisis” and the viability of their models going forward, in an environment where you’re fighting the yield curve / NIM compression, seemingly facing forced capital raises, absorbing increased cost of funding / wider credit spreads……

And probably most-critically at the core of this issue for Banks:“structural” forces(money market rates and the “antiquated” RRPfacility)which perpetuate a bleeding “deposit flight” that spans across non-SIFIs / regional banks who are already hemorraging in the securities portfolios from the Fed’s aggressive-but-late hiking cycle, and well-beyond the idiosycratic dynamics from SIVB’s (and regulators, and accountants) stunning risk-management failure to acknowledge “hot money” concentration risk from their homogenous “VC / Founder /Tech” cash-burning deposit base, and all into a tightening cycle from an inflation overshoot versus a whopping maturity mismatch from their“long duration” portfolio

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.