Obviously DC and the entire financial world is focused on what to do about the failure of Silicon Valley Bank (SVB) on Friday and then Signature Bank on Sunday. US officials worked over the weekend and before markets opened in Asia put together a package that protects all depositors at both banks and appears to have calmed markets.
Here is a link to the joint statement put out by Treasury, Fed and FDIC.
There is sure to be more fallout from the bank failures and the government’s reaction; I would expect a hearing in the Republican controlled House Financial Services Committee and the Senate Banking Committee in coming weeks. Question for regulators: was this the first social media run on a bank and what does that mean for policy?
Fed
With the failure of SVB and Signature Bank, and the quick response of the government, will the Fed follow this up with a rate increase at the next FOMC meeting on March 21-22?
Events of the past few days seem to take the chance of a 50bps increase off the table. Before the failure of SVB, markets were focused on the semiannual Congressional testimony of Fed Chair Jay Powell. During his initial testimony last Tuesday before the Senate Banking Committee the Chair struck a hawkish tone and clearly put 50bps on the table for the March meeting. The next day he toned down his remarks by emphasizing that the Fed will be data driven and that no decisions on rates at the FOMC meeting had been reached. And again, this all predates the banking crisis of this past weekend.
The labor numbers came in mixed on Friday with more jobs created than expected but a rise in the unemployment rate. The critical CPI number for February comes out on Tuesday. While there are many measures that officials look at, the CPI number is the one that gets the most media attention as it is easiest for the main street media to explain. In my political days it was the measure that my bosses looked at and was always an issue where the local press wanted a quote from their Representatives and Senators.
Budget
The other big markets related issue last week in DC was the release of the President Biden’s budget for fiscal year 2024 that begins on October 1. The Administration budget starts the process for Republicans to find a strategy to raise the national debt ceiling. Here is a link to the official White House summary of the President’s budget proposal.
The President’s budget increases spending on domestic programs long favored by Democrats, but pays for the new spending with tax increases on high net worth individuals and corporations. Last month House Speaker Kevin McCarthy and President Biden had a face to face meeting centered around the budget and the debt ceiling. Both sides left the White House agreeing to continue to talk as their budget proposals are released. At this point it is not clear when the Republicans will put their counteroffer on the table, but clearly at some point House Republicans will need to put a proposal on the table so that the two sides can begin serious talks.
After the President released his budget, the conservative House Freedom Caucus released their proposals that included repealing the money given to the IRS to go after tax cheats, opposing any tax increases and restoring spending levels to those passed by Congress for FY 2022. That would be a rollback of two years in spending levels–clearly unacceptable to Senate Democrats or President Biden.
The deadline for increasing the ceiling remains an elusive date, but it is likely to be sometime between July 4 and Labor Day. Finding common ground will not be easy with both sides having taken the three biggest items–Social Security, Medicare and defense spending–off the table. In fact the Biden Administration budget proposes a 3.2% defense increase over the current fiscal year to a record $842B.
Much discussion on how to find common ground in the coming weeks.