John Woods, APAC chief investment officer at Credit Suisse, discusses Federal Reserve policy and how it may change following the collapse of Silicon Valley Bank. He speaks on Bloomberg Television.
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Transcript
Let’s talk a little bit about what we’ve talked about before is the lack of it. We didn’t see any evidence of rate hikes and how they transmitted. Right now we’ve got it. But it came out of left field as usual.
But this is in the banking system. But of course, the banking system is also affects the overall economy. But with it being essentially saved, how does the Fed look at things now? And do they ignore, as are with the banks and just say that it’s business as usual and do 25?
Well, as a hike, I should say, I do think it was slightly odd, if not bizarre, that you had essentially seven or eight hikes in the space of 14 months and something of a disconnect between this extraordinarily tighter monetary policy and very little in the way of reaction in the real economy.
Well, that clearly is over now. We’ve seen the so-called monetary lag between a tightening and actually interest rates having an effect substantially reduced. My sense is that what we’re seeing in Silicon Valley Bank is more a catalyst. And actually the reduction of the lag
And the real impact now of interest rates is the underlying cause. To answer your question, Rush, I think the Fed literally now and more broadly, the financial markets are walking on eggshells. We really need to know precisely what impact this is likely to have around the
Broader market. My sense is that the Fed will probably pause because I think this is largely to do with liquidity risk. It’s more of a liability risk. And as such, I think depositors need confidence and a pause. I suspect a pleasant duty, though, as well or. Yes, I think that’s probably likely as
Well. More broadly, a pause in monetary tightening. This will lend greater confidence to depositors. The risk, then, of a run on on some of the smaller banks and possibly the medium sized specialist banks isn’t likely to diminish. And, you know, it’s not impossible that
In four or six months time, we will be looking through this this problem. Do you think we’re at the costs if when this goes away on the cusp of high risk rally, of a greater risk rally on the back of perhaps this being the end,
Really of what how many cuts that he made, 8 cuts and why 14 month hikes in 14 months? Well, David, I would say that one of the reasons the Fed has been relentless in just raising rates continually is because, to be fair, we’ve seen very little meaningful impact on inflation.
I mean, inflation has proven to be very, very sticky. But if there’s a banking crisis is an indication that finally interest rates are starting to have an effect. That economic deceleration can now start picking up, that some of the price pressures are particularly in wages
Growth is likely to diminish. We saw that obviously from the non-farm payroll numbers last week. Then, yes, I think the market will start looking towards easier monetary conditions. It’s, I guess, pivot, pause or persist. Personally, I’m more in the pause camp right now. I’m sure, you know, when things like
This happen, the regulators and the SBB and sort of forget we’re not subject to these stress tests as a stress test of the Fed implements here as well. But no doubt regulators will look at this. They’ll tighten things up, put their lenders on their books, but drop the
Broad drawbridge, as it were. And credit conditions may then get even tighter. And that could affect borrowers as well here in a big way. So, you know, the question has to be how much of this is going to be liquidity, is it?
Well, I think it largely is a liquidity issue that has a spillover into insolvency risk. And I guess ultimately that was the problem with this movement from the bank book to the trading book that caused these mark to market losses with SVP. But you’re absolutely right. You know, essentially a banking crisis,
Maybe not a banking crisis, but it certainly risks around the banking system. We’ll leave the tightening. Banks will be less willing, I think, to extend loans. We’re already seeing that from the senior loan officer survey of a few weeks ago. There is tightening.
And I think, again, that underscores the likelihood that economic deceleration is on the way. And ultimately we’re seeing the market pricing in a pause. Aren’t we dramatically over the last few days, but certainly into the months and quarters ahead? It becomes a lot more likely now than previously was the case.
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