Price Stability Versus Financial Stability

by Brad Houle, CFA
Principal

Fixed Income Research and Portfolio Management

This week all eyes were on the Federal Reserve and Fed Chairman Powell as they had the challenge of continuing to fight inflation all while trying to reassure the public of the safety and soundness of the banking system.  
As expected, the Federal Reserve increased interest rates by .25% on Wednesday. What the Federal Reserve says is as important as what they do, and the Fed needed to follow through with the rate hike or that would have sent a signal that things were more dire than they are in the banking system. That said, during the press conference, Fed Chairman Powell did acknowledge that they considered pausing the rate hikes due to the turbulence in the banking sector. In addition, he indicated that instability in a small segment of the banking sector would lead to an overall tightening of lending standards which would in turn help the Fed to get inflation under control. The markets are assuming a low probability that we might have one more .25% rate increase in May and then rates will be cut later this year.  Communication from the Federal Reserve suggested more rate increases are possible and there will be no rate cuts this year. 

The Federal Reserve has a dual mandate of price stability and full employment. Changing short-term interest rates is a blunt instrument used to stimulate the economy during economic weakness or to tap the brakes when inflation is too high. To address the recent issue of bank liquidity, a more nuanced approach is necessary. The new Bank Term Funding Program is a joint effort of the U.S. Treasury Department and the Federal Reserve which allows banks to access capital by pledging assets. 

The turmoil in the banking sector generally improved this week with steps toward a resolution of the Credit Suisse distress with UBS moving to take over the troubled Swiss bank. Price volatility continued in selected regional banks which were in part calmed by Secretary Janet Yellen. She indicated on two different occasions that the Treasury has the back of depositors without going so far as to guarantee the deposits at all banks. There is a lack of clarity on the regulatory ability of the Treasury to broadly guarantee deposits at banks.  

Ferguson Wellman Cash Management for Businesses and Institutions  

News headlines regarding the liquidity and solvency of banks of late have prompted questions about what to do with cash in the near term. While we are confident in the banking system and the safety of clients’ deposits, we wanted to remind clients of our ability to facilitate short-term cash management for both our business and institutional clients.   

The goal of our cash management offering is to preserve liquidity and optimize income and yield. This strategy’s composition and highlights are:  

  • Use of U.S. Treasury bills to exceed the rate of interest available from bank deposits  

  • Maximize liquidity and minimize interest rate risk with maturities less than one year  

  • Virtually no credit risk to the consumer, backed by the full faith and credit of the United States government 

  • Separate account management for streamlined reporting and performance tracking  

  • Opportunity to target very specific maturity dates for future cash needs  

  • Generally superior yields compared to less liquid CDs or third-party money market funds  

  • Ferguson Wellman personal service and expertise 

  • $4,000,000 minimum account size for corporate and institutional clients 

Please reach out to your contact at Ferguson Wellman or West Bearing if you are interested in learning more about this strategy. 

Takeaways for the Week 

  • The Federal Reserve is balancing actions to facilitate price stability and has to keep an eye on financial stability as regional banks have been under stress 

  • The Treasury Secretary proactively communicated support for depositors to calm the turmoil in some regional bank stocks

    Disclosures