Thoughts From The Divide – When It Becomes Serious

“We have credit conditions tightening, not just in the normal way but perhaps a little bit more”

As is normal for an FOMC week, headlines were swirling hither and thither as markets tried to anticipate the actions and tone of Jerome Powell and friends. A dovish hike? A hawkish pause? In the end, the Fed went with the anticipated move of 25bps, and while JP took time to explain what to expect going forward (“we will take a data-dependent approach”), the questions in the presser were on the smoke pouring from the banking sector.

Asked about whether we are “nearing the end stage of the banking turmoil among regional banks”, Powell replied,

“There were three large banks, really, from the very beginning that were at the heart of the stress that we — that we saw in early March, the severe period of stress. Those have now all been resolved, and all the depositors have been protected. I think that the resolution and sale of First Republic kind of draws a line under that period of — is an important step toward drawing a line under that period of severe stress.”

The shift to including “an important step”, implying that the period is not yet over, appears to have been a smart tactical move given that just a short while after declaring that “the U.S. banking system is sound and resilient”, PacWest announced that it was “weighing strategic options”, “including a possible sale”. We sympathize with those who might be aghast at the apparent dishonesty on the part of Powell but would point out that the chair couldn’t say, as a Twitter jokester pointed out, that “the US banking system is transitory” without serious repercussions. We are reminded of (the one and only) Jean-Claude Junker’s infamous “when it becomes serious you have to lie”. So, maybe it’s serious?

Following his comments on the state of banks, Powell clarified that the FOMC was paying close attention to lending and credit,

“… we are very focused on what’s happening with credit availability, particularly, you know, with what you saw in the Beige Book, and you will see in the SLOOS is small- and medium — medium-sized, small- and medium-sized banks who are feeling that they need to tighten credit standards, build liquidity. What’s going to be the macroeconomic effect of that?”.

We are loathe to go through the chair’s comments to try to divine what the SLOOS survey said (the Fed receives a copy in advance), but if mentions of credit tightening are any indication, things could indeed be getting serious.

P.S. Though the Fed/US are very different from the ECB/Eurozone, as Lagarde reminded us with her statement that the ECB is “not Fed-dependent”, the central bank’s latest lending survey showed that “Tightening was stronger than banks had expected… and points to a persistent weakening of loan dynamics”.

P.P.S. Real estate, the other smoldering heap we’ve been following, continues to fester.