Macro Commentary
- The Fed is expected to raise interest rates 25bp at Wednesday’s FOMC
- Banking turmoil continues with the collapse of First Republic Bank
- Despite the downturn in price, Bitcoin’s on-chain activity has hit ATHs
The Fed is expected to raise rates by 25bp this week, with probabilities indicating that this will likely be the last hike before entering a “higher for longer” stage of the hiking cycle, holding rates at the 5.00%-5.25% level for several months. Fed Chairman Powell’s language during the press conference will be heavily scrutinized for any forward guidance. Despite real-time inflation estimates and headline CPI continuing to decline aggressively, core PCE remains stable, and unemployment remains at multi-year lows.
Additionally, Chairman Powell will need to address the collapse of First Republic Bank (FRB) and how the aggressive hiking cycle may have contributed to its failure. While FRB’s proximity to Silicon Valley Bank (SVB) likely caused a significant deposit reduction, the bank’s inability to access the newly created BTFP may also have played a role. Though $30B from GSIBs and FHLB advances provided aid, FRB’s significant exposure to now unprofitable interest-only mortgages issued during a low rate environment contributed to FRB’s demise. It’s also important to note that FRB’s failure cannot be attributed to digital asset businesses, which was the popular narrative in the failures of Signature and Silvergate. JPMorgan has purchased FRB’s assets and will absorb all current deposits.
Leaders in the banking industry, the US Treasury Department, and President Biden have assured the public that this is an isolated crisis and that the banking industry remains well-capitalized and resilient. Similar reassurances were given after the collapses of SVB, Signature, and Silvergate. However, concerns remain about potential regional banking turmoil and losses related to commercial real estate exposure.
