3/16/2023

Welcome, everyone, to the latest debate. Financial markets are trying to find their footing in a week that saw bank failures and slightly cooling inflation. So as we look ahead to a Fed meeting next week, did the SVB collapse prove rate hikes are going too far? Jon Fortt is here to weigh in.

JON:

“Yes, these bank failures show it's time for the Fed to pause, and maybe even cut rates.

I mean, the whole point of raising rates is to cool things down, get less money gushing through the economy. One way to do that is get banks more afraid to lend, which is where we are with this instability. So, how did we get here? Silicon Valley Bank took in a ton of deposits in the first year of the pandemic, and locked that money up by buying too many bonds that take years to mature. But then as the Fed quickly raised interest rates and the economy slowed, SVB's depositors had a lot less money to put into the bank and needed to pull out a lot more. Which was a problem because, remember, SVB didn't have it in the safe — they used it to buy bonds that now they had to sell at a loss. Nobody likes to hear their bank's running out of money, so we got a bank run. But this isn't over. Rate hikes are pressure on the economy, and SVB was just one of the first institutions to crack. If the Fed raises rates again Wednesday, more surprising cracks will probably appear. And they might be the kind you can't fix with weekend rescues.”

But can the Fed just pause with rate hikes just because banks are feeling pain? Didn't Powell say pain was part of the plan?

JON:

“On the other hand, these bank problems aren't a reason to stop hiking.

Maybe go to a quarter point next week, but not stop. Because the banking system overall is healthy. Are there some edge cases where banks made easy-money bets that look bad in a tough-Fed world? Yes. But what did we expect, that every institution was perfectly disciplined on the way up? Let's face it, there's a certain group of stock investors who have been saying the Fed was going too far since the first 75 basis point hike, that inflation was fixing itself, that the Fed was driving us off a recession cliff. Well, stubbornly high inflation and tight labor markets suggest maybe the Fed's path has been a little Fast and Furious, but not quite Thelma and Louise. A couple of weeks ago, a lot of folks seemed to think we were heading for a soft landing or no landing. Remember that? Nobody likes pain. Or at least not this kind. But this is what Jay Powell warned us was coming when he said, "This is going to hurt me more than it hurts you." Wait, no. He said, higher interest rates will, quote "bring some pain to households and businesses. These are the unfortunate costs of reducing inflation, but a failure to restore price stability would mean far greater pain.”

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What do you think? Which side do you find more convincing, and why? Watch how it played out on Squawk Box below: