Banking and The Fed
The Federal Reserve’s Open Market Committee will be meeting this week and announcing their decision on interest rates. The market expects they will raise rates by 25 base points, with that being the last. They will be moving the Federal Funds Rate from a high end of five to five and a quarter, putting it above the current inflation rate of five. This is something we’ve been anticipating since the Fed started hiking rates. They needed to get the Fed Fund Rate above the inflation rate before they could pause. Now that the market has priced that in, it won’t be what the Fed does that is important; it will be what they say they’re going to do. Do they pause for a while and see where this goes? The way they’re trying to reduce inflation is with two tools. One is what they’re doing, which is raising interest rates. The other tool is their balance sheet. They expanded their balance sheet and bought around nine trillion dollars in assets during the pandemic, which was highly inflationary. They did that to try and stop the potential collapse of the financial system during that time. They had to start reducing that balance sheet and had been doing so throughout 2022. However, once again, they had to reverse course and put money back into the system when the Silicon Valley Bank failed in March. The Federal Reserve’s balance sheet went from roughly $8.3 trillion to $8.7 trillion in the weeks following the failure of the Silicon Valley Bank. Why is that important right now? It supports the banking system, but putting liquidity back into the system is inflationary. Over the weekend, we got the news that another California bank, First Republic Bank, is going into receivership by the FDIC, and JP Morgan will take them over. This is not a recommendation of either bank. The news of another large West Coast bank failing will muddy the waters on what the Fed can do. The Fed would like to have its balance sheet drop, but it couldn’t do it last time because it had to come in and save the banking system. Are they going to have to do that again? With this happening so close to the Fed meeting, they’re most likely going to get a lot of questions about this. It will be very telling what the Fed Chairperson says they’re looking at now that they have another West Coast Bank in receivership. This is interesting timing and much to review for the Federal Reserve. Of course, the all-important press conference will be where we get all the information.
With the Federal Reserve expected to raise rates another quarter of a percent this week, the question is, will they announce this is the last rate hike? We decided to look back at how the market has historically performed after the Fed paused rate hikes. We found that the S&P 500 has been up an average of 13%, six out of the eight past times, one year after the Fed paused its rate hiking. While this might give investors a lot to look forward to, it is essential to know the details. Unfortunately, the two negative years, 1974 and 2000, are similar to what the market and economy are experiencing today with higher inflation. So, while buying stocks has worked in most years after the Fed pauses, we are more cautious this year because of the higher inflationary environment that has led to lower returns in previous cycles. We will be watching the Fed closely as things unfold.
On Thursday, we got the official income migration numbers for the Great COVID Migration that occurred during the pandemic, and it was bigger than we thought. This shows the number of people moving from high-tax states with big cities, such as New York and California, into low- or no-income tax states like Florida and Texas. Florida added $63 billion worth of income during this time. Palm Beach County alone added $11.4 billion, more than every state other than Florida and Texas. Meanwhile, on the other side, California lost $47 billion, and $44 billion left New York, with Manhattan alone losing $31 billion. Alabama was a net gainer on these reports. During this time, the ten lowest-income tax states added about $100 billion of income, and the ten highest-income tax states lost about $100 billion, making it basically a direct trade-off. That pace doubled the pre-COVID pace. This becomes a bigger deal when this migration includes high-net-worth individuals. In fact, the average tax return for moving to Florida was $80,000 more than the return for a person leaving. This could change the landscape of schools, employment, company headquarters, etc. Will California, New York, and other high-income tax states decide to lower taxes, or will they continue to try to fight the battle? This also makes the Fed’s job harder because California and New York are much slower-growing economies than Florida and Texas right now. How does the Federal Reserve treat one state differently? You would think they would want to stimulate the California economy while also slowing down the Florida economy. It makes the Fed’s job a lot harder when the returns of states are doing so differently. It makes the threading of the needle of inflation much more difficult.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
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