MAGGIE PAGANO: Have interest rates peaked?
Has interest rates passed their peak? The tricky question for the Fed and Bank of England is whether they will continue with further hikes, says MAGGIE PAGANO
- Both banks were expected to retract their horns after the latest bank collapses
- The mood has hardened after the surprise decision by the ECB to raise interest rates by 0.5%
- Bet they’ll run softer, pushing rates up maybe 0.25%
Central bankers and financial regulators on both sides of the Atlantic are bracing for another rocky weekend after last week’s turmoil, which saw the second and third largest bank failures in US history.
They will keep their phones on red and their ears to the ground to find out if the dramatic measures taken by the US government to prevent further contagion after the collapse of Silicon Valley Bank, Silvergate and Signature Bank – and the lifeline those First Republic Bank – are enough to bolster the confidence of further runs.
In addition to guaranteeing deposits with the three troubled financial institutions, the Federal Reserve took the unprecedented step of creating a Bank Term Funding Program designed to help banks restructure their bond portfolios.
This means that the Fed is now giving banks the ability to access billions of cash, enabling them to pledge their bond holdings based on the face value of the assets, rather than the usual market price.
Why this is so important is that the par value will be higher than the current market value, as the bonds they own now are based on lower yields, which they picked up when interest rates were low.
Rolling the dice: the tricky question facing the Fed and Bank of England is whether they will continue with rate hikes
On top of these emergency measures, the Fed has expanded its balance sheet by £240bn this week alone.
It’s another big and highly political move, prompting economists to question whether this marks a pause in quantitative tightening – a policy that had only just begun. They also worry about the future implications of such a turnaround.
Serious questions are also being asked about who is responsible for this recent turmoil: the bankers who piled on so eagerly to wrap up their bond portfolios they considered low-risk or the regulators who encouraged them? Or both.
It is still too early to say whether the latest measures will be sufficient to boost confidence. However, what the authorities have done is create moral hazard by insuring the banks. It’s a free card to get out of jail. US Treasury Secretary Janet Yellen has assured Congress that the broader banking system is safe and that no taxpayer money will be used for bailouts. What they’re not doing, at least so far, is what trader Nassim Taleb, who wrote The Black Swan, described after the 2008 crash as “socializing losses, privatizing gains.”
Yet Yellen’s words have not done their job. Shares of First Republic – which received an emergency injection – fell sharply again yesterday. So did stocks in other regional lenders, along with most European banking stocks, including Credit Suisse, which also bailed out.
The tricky question facing the Fed and Bank of England is whether they will continue with rate hikes when they meet next week. It had looked like both banks would pull their horns after these latest collapses, as any rise in interest rates would only further depress bond prices and send investors reeling.
But the mood has hardened after the surprise decision by the European Central Bank to raise interest rates by 0.5 percentage point on Thursday. The bet is that both banks will soften, raise rates perhaps 0.25 percentage points, then stop and watch. They should heed President Theodore Roosevelt who said in his 1901 speech, “Speak softly and carry a large stick; you will go far.’
Nuclear moon
Rolls-Royce goes to the moon with its nuclear reactors.
The UK Space Agency has just given the aerospace giant the funding to build a microreactor on the moon, one that would provide enough energy for humans to live there. Still, Rolls-Royce is still a long way off before the government launches its tendering process for small modular reactors here on Earth.
Launching the SMR tender as part of the Great British Nuclear program was one of the better moves to emerge from the budget, with more details to be announced towards the end of the month.
What’s annoying is that Rolls-Royce is by far the strongest contender to win the contract, yet still has to jump through the technical hoops alongside other competitors. It seems completely crazy, but if the government does not hold a formal tender process, other competitors can go to court to have the decision reversed.
If HMG doesn’t put on its skates, Rolls-Royce could make it to the moon before building the acclaimed SMRs.