Barr Hangover

Yesterday Vice Chair for Supervision Michael Barr concluded two days of testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.?

?

Lawmakers asked Barr repeatedly during the exchange on whether or not the Fed failed to do its job as a?“supervisor”?in the case of Silicon Valley Bank (SVB).

?

Barr argued the bank's failure was not a reflection of the Fed, and rather?a?"textbook case of bank mismanagement."?Silicon Valley Bank?"failed because its management failed to appropriately address clear interest-rate risk and clear liquidity risk,"?he said.?

?

According to Barr’s testimony, Fed supervisors first found?“deficiencies in the bank's liquidity risk management”?at the end of 2021, which resulted in six supervisory findings related to the bank's liquidity stress testing, contingency funding, and liquidity risk management. Barr himself, however, first became aware of the situation at Silicon Valley Bank in the middle part of last month.?

?

Barr received criticisms from both sides of the aisle as he seemed to indicate the Fed and regulators had completed their duties by simply noting the issues at the institutions. As one client aptly put it?“So, the FED found issues but did nothing to fix them! They found an embedded culture but did nothing!”

?

While the finger pointing will no doubt continue beyond this week’s testimony, there was seemingly a missing player among all the mudslinging; rating agencies largely escaped unscathed. As?Bloomberg News?aptly noted, there were no questions as to why Silicon Valley Bank maintained a solid rating?a week before it collapsed.?

The Fed is?"looking at whether those standards were sufficiently stringent, whether the firm should've been downgraded further and whether further supervisory steps should've been taken."?

After two days of testimony, there are arguably now more questions than answers in terms of who is at fault and what can be done to prevent a repeat of SVB.

When pressed on preventing such situations or failures in the future, Barr said he anticipates a need to strengthen capital and liquidity rules for some regional banks after being loosened at the end of the last decade.?

?

“I anticipate the need to strengthen capital and liquidity standards for banks with over $100 billion,”?said Barr.

?

Senator Elizabeth Warren of Massachusetts was among those who pointed out that Silicon Valley Bank specifically benefited from a number of regulatory adjustments including 1) the Fed’s decision to exempt banks with $150-250 billion in assets from maintaining a standard?“liquidity coverage ratio,”?as well as 2) a decision to allow most small and mid-sized institutions to opt out of deducting paper losses on bonds from key regulatory capital levels.?

?

According to?The Washington Post, the Biden administration is already working on a proposal to address risks at regional banks between $100-$250 billion.?

?

On the economic calendar front yesterday, MBA mortgage applications rose 2.9% in the week ending March 24 following a 3.0% increase the week prior. The 30-year mortgage rate, however, declined 3bps to 6.45% a six-week low.

?

Also yesterday, pending home sales unexpectedly rose 0.8% in February following an 8.1% gain at the start of the year. According to the median estimate on?Bloomberg, pending home sales were expected to decline 3.0%. Over the past 12 months, however, pending home sales dropped 21.1%, the 15th?consecutive month of decline.

?

This morning, GDP was unexpectedly revised lower one-tenth of a percentage point to a 2.6% increase on an annualized basis in the final Q4 report. According to the median estimate on?Bloomberg, activity in the final three months of 2022 was expected to be unrevised at a 2.7% gain.

?

In the details of the report, personal consumption was revised down from a 1.4% gain to a 1.0% increase in the final Q4 report, down from a 2.3% rise in Q3.

?

Goods consumption, however, was revised higher from a 0.5% decline to a lesser 0.1% decrease in the third-round Q4 report, marking the third consecutive quarter of decline. Durable goods consumption was revised higher from a 1.8% drop to a 1.3% decline, and nondurables consumption was revised up from +0.2% to +0.6%.

?

Services consumption, on the other hand, was revised down from a 2.4% increase to a 1.6% gain in the final Q4 report, following a 3.7% rise in Q3.

?

Gross private investment, a gauge of business spending, was revised up from a 3.7% gain to a 4.5% rise in the third-round Q4 report following two consecutive quarters of decline.

?

Fixed investment was revised higher from a 4.6% drop to a lesser 3.8% decline in the final Q4 report following a 3.5% decline in Q3.

?

Nonresidential investment, including office buildings and factories, was revised up from +3.3% to +4.0%, due to an upward revision to structures investment from an 8.5% rise to a 15.8% gain. Intellectual property investment, however, was revised down from a 7.4% gain to a 6.2% increase, and equipment investment was revised lower from a 3.2% decline to a lesser 3.5% drop in the final Q4 report.

?

Additionally, residential investment was revised slightly higher from a 25.9% decline to a lesser 25.1% decrease, marking the seventh consecutive quarter of decline.

?

On the trade side, exports were revised down from -1.6% to -3.7%, and imports were revised lower from -4.2% to -5.5%.

?

Finally, government consumption was revised up two-tenths of a percentage point to a 3.8% gain. Nondefense spending was revised lower from a 10.8% rise to a 10.6% increase, federal spending was revised down from a tenth of a percentage point to a 5.8% increase, while national defense spending was revised up a tenth of a percentage point to a 2.3% gain. State and local spending, meanwhile, was revised up from a 2.3% increase to a 2.6% gain in the third-round Q4 report.

?

Bottom Line:?Growth remains solid, or at least it was solid at the end of last year. While the composition of growth was revised away from consumer activity towards investment and government outlays, topline growth was little changed from the preliminary estimate. Of course, digging deeper and excluding trade and inventories, which combined contributed more than 1.8% to headline growth, real final sales to domestic producers rose just 0.7% at the end of 2022, painting a more tepid picture of activity.?

?

For the Fed, however, modest, positive activity reinforces the notion that earlier rate hikes have had a minimal impact and furthermore that businesses and consumers can withstand a further backup in rates.?

?

Also this morning, initial jobless claims rose 7k from 191k to 198k in the week ending March 25, a three-week high. According to?Bloomberg,?jobless claims were expected to rise to 196k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.685M to 1.689M in the week ending March 18.

?

And, tomorrow, an updated look at consumer spending activity against the backdrop of the latest read on prices.?

?

Last month, the PCE rose 0.6% in January, a tenth of a percentage point more than expected. Year-over-year, headline inflation increased 5.4%, up one-tenth from an earlier reading in December. Excluding food and energy, the core PCE rose 0.6% at the start of the year, also surpassing expectations. Year-over-year, core inflation increased 4.7%, also rising one tenth from the prior month.

?

This month, the PCE is expected to rise 0.3% in February and 5.1% over the past 12 months. And the core PCE is expected to increase 0.4% in February and 4.7% year-over-year. Any upside surprise will likely make it increasingly more difficult for the Committee to stray from a pathway to higher rates.

?

While the U.S. waits on March inflation data, overseas the latest report shows prices – while still elevated – have retreated markedly in the wake of reduced energy costs. In Spain, for example, inflation rose 3.3% in March, down from the 6.0% annual gain in February, while consumer prices in Germany rose 7.8% in March following a 9.3% gain in February.

?

?-Lindsey Piegza, Ph.D., Chief Economist?