Friday Self-correcting Charts
Remember the Great Banking Crisis of 2023?
It's been three surprisingly uneventful weeks since the last bank failure in the United States and the crisis already feels like a distant memory.
Did the Fed stick save a sure disaster? Or was it never much of a crisis to start with?
The counterfactual is unknowable, but, whatever threat was coming our way, the Fed seems to have cut it off at the pass.
The mini-crisis may have done us a favor even: This morning's inflation report was reassuringly tepid, January data that spooked markets looks less spooky after being revised down, and consumer confidence surveys suggest the banking drama may have been perfectly timed to give inflation a final shove into disinflation.
It may be that the market is a self-correcting mechanism that's delivered exactly the shock we needed.
But it may also be that the Fed has just papered over the cracks in the structurally unsound house of banking: Our banking system is dependent on deposits and deposits are fleeing to money market funds.
That's a threat that a slightly-lower-than-otherwise-expected fed funds rate is not going to fix.
If the yield curve remains inverted for another year or so, we could find ourselves in a banking crisis that even the Fed can't save us from: Banks need much lower rates to both stem the outflow of deposits and limit the losses on their assets — the Fed stopping at 5% instead of 5.5% is not going to help much with either of those existential threats.
Counterintuitively, we may have needed a bigger banking crisis to get the rate cuts we need to forestall an even bigger banking crisis.
So was this crisis too little of a bad thing?
Let's check the charts to find out.
The good thing:
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