The Federal Reserve blinks

The number of fights over the few last weeks between social-media-fueled digital bank runs and the fractional reserve system hasn’t ended pretty for the latter. Signs are there might be more to come.

Looks like this is giving the Fed pause, even though their inflation-combatting job appears far from done:

The Fed chair was speaking after the bank raised rates by a quarter-point and signalled it might be close to concluding its campaign to stamp out inflation following the most aggressive monetary-tightening campaign in decades.

The end of painful rate rises would normally be a cause for relief, even celebration, but for one inconvenient fact: the reason the Fed thinks it can afford to let up is the worst bout of banking turmoil since the great financial crisis of 2008 — and one that critics of the US central bank argue it should have seen coming.

“They’re afraid that they are getting close to thin ice,” said Diane Swonk, chief economist at KPMG, of the predicament facing the Fed. It must now decide whether to keep slamming the brakes on the economy, or whether a looming credit crunch precipitated by the collapse of Silicon Valley Bank and Signature Bank will do the job for it. “They want to cool inflation without sending the economy into a deep freeze and that is just a very hard thing to do,” Swonk added.

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Perhaps that tiny little piece of QT they actually have done helped to bring on the crisis? It looks like the Fed has already reversed. Perhaps QT is an unrealistic concept in the first place:

Fasten seat belts?


Looks like 2/3 of a whole year of QT has been reversed in a week or two!


You have to love Monday morning quarterbacks. Second guessing the FED is one message but what the financial institutions do not say, the financials messed up and they are trying to put the blame elsewhere.

Who invests with institutions and economists who guess weeks later what might happen?

The FED is not done. Operation Twist is alive and kicking.

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The Fed addressed the recent banking crisis by opening a new facility which lends to banks based on the par value of their Treasuries as collateral (even though the market value is lower). The loans are assets on the Fed’s balance sheet. That’s the sudden blip upward. I wonder if the Fed is continuing their regular program of allowing their own book of Treasuries and mortgage bonds to roll off as usual.



Yep. Just like they created a “new facility” in the GFC … that never got fully drained off their balance sheet. And just like the emergency COVID “new facility” … that never got fully drained from their balance sheet. And just like the post-COVID “new facility” … that never got fully drained from their balance sheet.

Probably. They would likely disclose any changes to that program (the ~$95B runoff each month that’s been mentioned in most fed releases lately). In fact, I just peeked at their latest press release (the 22-March-23 “implementation note”) and they’re still doing the $95B a month.


There seems no end to this, doesn’t it. And every feeble attempt at QT is soon met by a crisis.

So having started to go down the monetizing debt avenue, is there any way out, or are we destined to follow it until the wheels fly off.


If you are invested in the bond market it is a crisis.

Otherwise this is not a huge meltdown. I sincerely think it wont be a major meltdown.

The corporate profits are fading. That is the next crisis. My only intent is my entry in the equity markets. The fading profits will be drawn out. We will get into a recession here. I doubt it will be much of a recession. The labor market will get banged up a bit but only briefly.

Opinions vary:
The Federal Reserve will keep raising interest rates despite traders betting otherwise as fears of a banking crisis convulse markets, according to BlackRock Inc.

The world’s biggest money manager favors inflation-linked bonds — securities that offer protection from rising prices — on the view markets are wrong in expecting imminent US rate cuts as the economy lurches toward a recession. This time is different as the Fed and its peers have made clear that troubles buffeting the banking sector won’t halt their battle against inflation, BlackRock Investment Institute strategists including Wei Li wrote in a client note.

“We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as recession hit,” the strategists said. “We see a new, more nuanced phase of curbing inflation ahead: less fighting but still no rate cuts.”

BlackRock’s view clashes with those of TD Securities and DoubleLine Capital LP, who say the Fed is mistaken about the need to keep raising interest rates as the risk of recession grows.


Let’s keep this in perspective. If not for the failure of some poorly managed banks, this would not even be a topic of conversation.

So, the way out of this mess seems rather clear. Bring back the Dodd Frank rules for banks with $50 billion or more in assets.


Yes and no. The discussion would not be muddied by a crisis but the long end of the curve would be bought at this point.

Remember we are living in a fractional reserve world. Once confidence wanes, a bank run can kill almost any bank. Especially a turbo-charged social-media-supported bank run.

Agreed, but none of the banks would have failed if they had been properly regulated.


I don’t think that’s true. Regulators are not a magic panacea, they don’t know everything, they especially don’t know what they don’t know. Until a bank like this one failed (VC cash, sudden growth, etc.) regulators were wandering in the weeds. They had inklings that things weren’t right, but maybe not exactly what to do.

It isn’t always about what you know or don’t know. It is often simply about what you allow or don’t allow.

One of SVB’s first targets was a key Dodd-Frank reform aimed at preventing federally insured banks from using deposits for risky investments. In 2012, SVB petitioned the Obama administration to exempt venture capital from the so-called Volcker Rule, which prevented banks from investing in or sponsoring private equity or hedge funds.

In the transition between the Obama and Trump administrations, SVB got what it wanted: a string of deregulation, based on the idea that the bank posed no threat to the financial system.

Two years later, SVB was one of just a handful of banks to receive a five-year exemption from the Volcker Rule, allowing it to maintain its investments in high-risk venture capital funds.

And of course in 2018, the threshold was moved from 50 bil to 250 so the exemption was no longer needed.


Remember this from March2020, the panic response to the plague?

Policy Tools
Reserve Requirements
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.

I cringe when people criticize the Fed.
Overall, I tend to think they are operating from a different 30k-foot POV than the whining, myopic, “self serving”, my-ox-is-being-gored Monday-morning-quarterbacks…

Did no one at that august body not think to reinstate the previous “reserve” levels…BEFORE, raising interest rates?
If all those “weak” banks, had been given time to bring their reserves back to whatever level previously required, they’d be less likely to “break”, less susceptible to catastrophic bank runs. Yes?

Da&$n Jerome. Where is your head?
I’m rethinking my opinion!

ralph saw reference to this on Tom Nash YouTube.

Never let a crisis go to waste?


There were more dramatic problems with gold.