ORLANDO, Fla., May 3 (Reuters) – The Fed could hike US interest rates again on Wednesday, but cracks emerging on multiple fronts – jobs, lending, the banking system and debt ceiling – strongly suggest this will be the last of the cycle will be.
Elements of all four have come together ahead of the Fed’s FOMC meeting this week, causing interest rate futures markets to wipe out any prospect of movement next month and even raising some doubts about a final hurray on Wednesday.
Ahead of Tuesday’s “JOLTS” March jobs data, interest rate futures were pricing in a 28% chance the Fed will raise its Fed Funds target range by a quarter point to 5.25-5.50% on June 14th.
That was from a fixed 25 basis point hike later Wednesday to 5.00-5.25%.
The June hike is now completely off the table and traders now see a 15% chance the Fed will not hike at all this week or in June. From “one and done” to “done”?
Sudden, significant fluctuations in market prices are common and can reverse as quickly as they occur. But evidence is mounting that what the Fed is calling a “long and variable” lag of nearly 500 basis points in monetary tightening since last January is finally biting.
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The banking system began to bleed in March, and now the skin of the economy is tearing as well. This is relevant to the June 14 policy decision as the Fed also releases its new summary of economic forecasts on the same day.
While inflation remains stubborn and there are undoubtedly areas of economic resilience – think PMIs – the impact of the most aggressive tightening campaign in 40 years will only worsen over the next six weeks.
Consider what has happened in relation to banks, credit conditions and the debt ceiling since the FOMC meeting on March 21-22, a meeting at which “several participants” considered putting interest rates on hold due to the banking explosion earlier in the month place.
First Republic Bank FRC.N Bank became the largest US bank failure since 2008; the Fed still makes more than $300 billion in emergency loans available to banks; small business credit conditions have deteriorated sharply; and Treasury Secretary Janet Yellen said the Treasury could run out of money on June 1.
“As developments in the banking sector continue to unfold, some FOMC policymakers may prefer a wait-and-see approach to the prospect of further rate hikes in June and beyond,” HSBC US Economist Ryan Wang wrote on Tuesday.
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JACK OF BLUE BLUE
There is little evidence that regional banks will be out of the line of fire any time soon. The KBW regional bank index fell 5.5% to a two-and-a-half-year low on Tuesday, losing a third of its value in two months.
Deposit flight may have stopped, but Fed officials will be aware of the negative feedback loop on the economy, given the ingrained ties between small banks and businesses.
According to Goldman Sachs, 70% of small business commercial and industrial loans come from banks with assets under $250 billion; in more than half of US counties, non-“global systemically important banks” lend 90% to small businesses; and 75% of small business loans come from banks located within 25 miles of the borrower.
“This steady onslaught on regional banks is destructive to financial markets and ultimately the economy,” former Boston Fed President Eric Rosengren tweeted Tuesday.
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Small businesses account for around 40% of national employment. Tuesday’s numbers showed job vacancies from “JOLTS” — Fed Chair Jerome Powell’s favorite jobs indicator — fell for a third month to the lowest level in almost two years.
The March survey of small businesses by the National Federation of Independent Business showed several signs of weakness, and even more attention than usual will be given to the next Senior Loan Officer Opinion Survey.
The quarterly survey of banks on whether to tighten or loosen lending standards is due out next week but is in the hands of FOMC rate-setters this week.
That will matter little if the failure to break the stalemate on the US $31.4 trillion debt ceiling.
Many analysts believe that the so-called “X-date” when the state coffers run dry will be late July or early August, although some point in June cannot be ruled out. Yellen warned on Monday it could be June 1st.
Will the Fed hike rates on June 14th if this is still a topical issue? You can never say never, but the short answer is no.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Related columns:
– Small US banks and companies cause big problems
– “Peak Fed” tightens burdens on the US debt ceiling
– The Fed’s ‘R-Star’ becomes a black hole
By Jamie McGeever; Adaptation of Lincoln Feast
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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.
Jamie McGeever
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