Will The Fed Blink Over The Banking Crisis?

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In his Daily Market Notes report to investors, Louis Navellier wrote:

A No-Win Situation

The big Fed day has arrived. Will the Fed blink over the banking crisis?

We’re in a bit of a no-win situation: If the Fed increases today and announces that they are officially taking a pause, or even skips an increase today, if the reason they do so is because they are fearful over a dominoing regional bank crisis, is that actually good news? 

On the flip side, if they raise and say they are likely to raise again in June because inflation is far from 2%, the banking crisis is not a worry, and the economy is strong enough to take the heat, is that really bad news?

The Big Picture

The markets may initially rally on a dovish stance, or pull back on a hawkish one, but the reasons for the Fed’s position may run counter to underlying growth trends.

In the big picture, as long as unemployment is low and consumers continue to spend, the economy isn’t broken, and even 5% inflation is an environment the economy has thrived with in the past.

Indeed, 50 years ago passbook savings accounts at banks paid 5% (savings and loans got to pay 5.25% to allow them to compete) and that was considered rational and conservative.

That interest rates have been so far below that for so long, not including the manipulative Quantitative Easing, while budget deficits soared into the trillions was more of a perplexing set of circumstances to explain.

For now, savers can get nearly 5% in money markets, at or above real inflation, and many companies have demonstrated this quarter the ability to push through price increases and grow profits.

Unavoidable Pain

Early on, the Fed said “there will be pain” from their plan to increase rates to bring inflation down, and they should have been the least surprised that bank depositors would seek higher yields available and that banks holding low-interest debts would see those assets go down in value.

Perhaps that has always been part of the unavoidable pain they anticipated and won’t be a reason to take their eye off slowing the economy enough to bring down inflation.

However, I believe that we are going to get a dovish statement, regardless of what the Fed does simply because we are having these banking problems since ultimately, the Fed is in charge of the banks.

 We will know in a few hours how the Fed is viewing the regional banking situation, if they think inflation trends are falling fast enough to pause, and whether they see signs of an actual recession, and if so is that still secondary to their inflation goals.

Don’t be surprised if stocks move hard one way on the headline, and reverse after further consideration.

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