The Federal Reserve Takes Center Stage
June 8, 2023
Dodging a Bullet on the Debt Ceiling
U.S. financial markets received a welcome reprieve, with the early June passage and signing of the debt ceiling compromise bill – negotiated down to the wire of the X-date, when the U.S. Treasury would have run out of cash to fulfill its obligations (both debt and other payments). The stock market enjoyed its best day since January, after the Senate passed the compromise legislation on Friday, June 2nd.
It is worth noting that the phrase, “It’s not over ‘til it’s over,” applies to political negotiations, as well as to sports. In 2008, the TARP bank bailout was rejected on its first House vote, causing a 7% fall in the stock market on the day that it failed to pass. The 2011 debt ceiling showdown caused the stock market to fall by 17% in a month and led to an S&P debt rating downgrade of U.S. government debt.
Fortunately, we have avoided a similar result in 2023; however, it is a reminder that Winston Churchill’s observation – “Americans will always do the right thing, only after they have tried everything else” – very much applies to political negotiations over important economic matters.
The Federal Reserve Takes Center Stage
The Federal Reserve is likely to take center stage again in June and July, with the two upcoming FOMC meetings and their resulting effect on interest rates and the banking crisis.
We are looking at a busy June and July economic calendar:
- 6/13 and 7/12: U.S. CPI data released
- 6/14: Scheduled date for the Federal Reserve’s next interest rate announcement
- July: Bank earnings start to be announced
- 7/7: Employment data released
- 7/26: The Fed ends July with another FOMC meeting
Federal Reserve speakers have stated that the Fed will be data dependent. Nonetheless, bias from the May FOMC announcement, Chairman Jerome Powell’s press conference, and comments from Fed speakers since the last announcement have been largely hawkish – and most certainly not indicative of a near-term lowering of interest rates.
We have seen recent signals from Fed speakers regarding a “hawkish pause” or a “skip” in rate hikes at the June meeting, leaving the door open to raise rates in July.
These indications from Fed speakers can change quickly, though, and we may well see a hike in rates in June, if inflation data comes in higher than expected. The Fed finds itself between a rock and a hard place on interest rates: its prescription for curing inflation (higher short-term rates) hurts the banking system that it regulates.
Banks: The Calm Between Storms?
I authored an in-depth piece last month on why this banking crisis is likely to continue. We may see data on regional banks’ deposits in June, but that only reveals information about the balance sheets of the banks. The true indication of their health will come in July and August during earnings season, when both the deposit and wholesale funding levels will be revealed – and just as importantly, the cost of those deposits and wholesale funds on the banks’ income statements. Recall that First Republic reported earnings on a Monday afternoon, revealing the issues surrounding the amount and cost of its funding – and was declared insolvent within a week. Stay tuned, as June could turn out to be the calm between storms in the banking crisis.
Portfolio Management Thoughts
I wanted to take a moment to reiterate a few cash management and portfolio management themes I’ve previously discussed:
- Separate the cash you need – for near-term living expenses or upcoming major expenses – from your long-term investment portfolio. Having a bit more cash than you might normally need will allow you to ride out or take advantage of any volatility in the financial markets.
- Understand FDIC insurance limits and how to keep your cash safe. I expanded on this topic in detail in our May commentary. Your Farther advisor can help you manage your cash, improve its safety, and likely, its yield – through the use of U.S. Treasury Money Market Funds, ETFs, or T-Bills.
- Be prepared to take advantage of potential volatility in the financial markets. We dodged a bullet with the debt ceiling, which was resolved without much market volatility. A repeat of 2011’s 17% stock market sell-off would likely have presented very interesting opportunities to add into or rebalance portfolios. Our advisors and Investment Committee watch for these potential market opportunities on our clients’ behalf.
- Most importantly, focus on the long-term outlook for your investment portfolio. A long-term portfolio is designed to meet your long-term goals for growth and income – and to support your specific needs and overarching financial plan. Trying to time the market is a very challenging game. Missing out on a handful of the best performing days can dramatically reduce investors’ returns. While we might make small tactical changes in portfolios, in response to market and economic circumstances, the core of our clients’ portfolios tends to remain consistent and focused on the long-term.
As always, we encourage you to connect with your Farther advisor for any questions.