The FOMC released its latest statement on monetary policy on Wednesday, May 3, 2023. The Fed hiked its target rate 25 basis points in the face of a heavily inverted yield curve and a banking crisis.

While the 25 basis point hike was widely expected by the markets, it is still somewhat surprising given the economic conditions. Sure, the CPI is still showing consumer prices rising at 5% annually. But it took the Fed long enough to realize price inflation was a problem before it actually stopped expanding its balance sheet just over a year ago.

In the course of just over a year, the Fed has hiked its target for the federal funds rate by 500 basis points (5%). It has gone from near zero to just over 5%.

The inverted yield curve that has been there for months appears to not bother Jerome Powell and other Fed officials. Maybe they really are worried about the dollar enough that they are willing to throw us into a recession.

A recession is baked into the cake anyway, but at this point in the boom/ bust cycle, it is still a bit surprising that the Fed is still hiking rates with most people realistically expecting a recession in the near future.

This Would be Funny if it Weren’t so Damaging

Jerome Powell held a press conference after the statement was released. The first point he addressed was the banking system.

He said, “the U.S. banking system is sound and resilient.” Just a couple of hours later, another regional bank announced it is exploring all options in order to stay afloat. In other words, it’s another major bank in default.

Powell’s comments came just a few days after First Republic went bankrupt and was taken over by JP Morgan Chase.

We are in the midst of a banking crisis and Powell is standing there saying that the system is sound and resilient. He might as well just stand there and repeat, “Don’t worry guys. I’ve got everything under control.”

When he says it is sound and resilient, maybe he is just displaying his own confidence in the Fed’s ability to create money out of thin air. Perhaps any system that is backed by the ability to create endless money is always sound and resilient.

My family budget would be quite resilient if I could just print money any time it was “needed”.

Even though this is serious business, it is still hilarious. You’d think Powell could have at least timed his comments a little better if he is going to try to gaslight everyone.

Who Pays?

With these somewhat major banks going belly up, who is paying for all of this? So far, it hasn’t been depositors. That was made clear with Silicon Valley Bank.

When these banks are acquired by the biggest of banks such as JP Morgan, you can bet that they aren’t just taking on a bunch of unnecessary risk. The Fed is probably taking on the bad assets from the bankrupt banks, or else they are giving some kind of guarantee to the big banks buying them out.

Ultimately, it is the average American who is paying for all of this. When Silicon Valley Bank had to be bailed out, the Fed’s balance sheet went from slowly declining to expanding by almost $400 billion in the matter of a few weeks.

So while the Fed is supposedly in tightening mode with higher interest rates, there is little doubt that the Fed will take care of one of its primary duties when called upon. That is to bail out the banking system.

Its other main job is to fund the deficits from Congress, but it hasn’t been doing that lately. It seems that this is a secondary job compared to bailing out the banks.

Anyway, we all pay in the form of a depreciating dollar.

The Financial Crisis is Here

Jerome Powell can say whatever he wants, but it doesn’t change the facts on the ground. The yield curve is heavily inverted while the Fed just hiked its target rate again.

This points to a hard recession coming up.

If that weren’t enough, now we have somewhat big banks (not the biggest banks) going under, largely because of the rising interest rates.

This almost seems like a perfect storm of disaster. This could make 2008 look like a picnic.

The crazy thing is that stocks were going up last week. In the face of an inverted yield curve, rising rates, and a banking crisis, apparently some investors are still bullish on stocks.

This Everything Bubble is going to implode hard. The warning signs are everywhere. The banking crisis is a symptom, but sometimes it is important to pay attention to symptoms and not ignore them.