JACK OTTER: THE FEDERAL RESERVE
WENT WITH A 25 RACIST BANK
HIKE.
THIS PUSH AS INTO RECESSION?
THE HEAD OF US ECONOMICS,
MICHAEL GAPEN.
THANKS FOR BEING ON THE SHOW.
ALL THE EYES HAVE BEEN ON JAY
POWELL FOR YEARS NOW BUT WITH
THIS BANKING CRISIS OR MANY
BANKING CRISIS LENDING
STANDARDS HAVE BEEN GETTING
VERY TIGHT AND I’VE HEARD
ANECDOTALLY SOME SMALLER
COMMUNITY BANKS ALMOST SHUT THE
DOOR, WITH THOSE THINGS
COMBINED HOW MUCH WILL THAT
SLOW THE ECONOMY?
>> THAT THE OPEN QUESTION.
TO SOME DEGREE, THIS SHOULD BE
EXPECTED.
THIS IS ONE OF THE MAIN
CHANNELS THROUGH WHICH THE
FEDERAL RESERVE CAN SLOW THE
ECONOMY.
WE SHOULD EXPECT LENDING
STANDARDS TO TIGHTEN, WE SHOULD
EXPECT LOAN GROWTH TO SLOW.
THE QUESTION, HAVE RECENT
EVENTS MEANT WE WOULD GET MORE
TIGHTENING THAN WE THOUGHT?
AND ANTICIPATED TIGHTENING, IS
THERE A CREDIT CRUNCH AROUND THE CORNER, LOAN GROWTH WAS
THE CORNER, LOAN GROWTH WAS
SLOWING COMING INTO THIS EVENT,
THIS WILL DO THE FED’S JUDGE FOR THEM, THE FED SAID THAT,
FOR THEM, THE FED SAID THAT,
ESSENTIALLY MENTIONED THAT.
IT’S A DISINFLATIONARY SHOCK,
THE FED WILL TIGHTEN THE SLOWER
LOAN GROWTH WILL HELP THE
ECONOMY SLOW DOWN AND BRING
INFLATION.
JACK OTTER: COMBINED THOSE WITH
A 25 BASIS POINT HIKE, HAS THE
FED BEEN TOO AGGRESSIVE?
YEAR-OVER-YEAR INFLATION IS
PRE-HIGH BUT IF YOU LOOK AT
MORE RECENT INDICATORS, CASE
SHILLER HOUSING INDEX IS DOWN 6
STRAIGHT MONTHS AND EVERYONE
EXPECT NEXT WEEK TO BE THE
SEVENTH STRAIGHT MONTH, THAT IS
WORRISOME.
>> TOO EARLY TO KNOW.
I DON’T THINK THE FED HAS DONE
MUCH.
HOUSING HAS SLOWED, BUSINESS
SPENDING ON STRUCTURES AND
EQUIPMENT, MANUFACTURING
PRODUCTION IS COMING OFF SO
THIS IS THE NEXT STEP, LOANS
AND STANDARDS ARE TIGHTENING.
IT IS HARD TO ARGUE IF WE ADD
311,000 JOBS SO ESSENTIALLY IT
IS AN INVESTMENT, LET’S SLOW
DOWN RIGHT NOW.
WE SUSPECT IT WILL TRANSITION
TO A CONSUMER SLOW DOWN LATER
THIS YEAR.
I DON’T THINK THE FED HAS
OVERDONE IT BUT WE WILL SEE WHO
CAN GET A LARGE NEGATIVE SHOCK
AND THE FED MAY HAVE TO
BACKPEDAL.
RIGHT NOW THE DATA DOESN’T
SUGGEST THAT IS THE CASE.
JACK OTTER: THE JOB IS ONE
THING THAT HAS HELD UP BUT YOU
HAVE BEEN PREDICTING MILD
RECESSION, THE ODDS ARE HIGH
HAVE A MILD RECESSION, ANYTHING
CHANGE YOUR MIND?
>> THE EVENTS HAVE OPENED UP
DOWNSIDE RISK FOR THE FIRST
TIME SINCE THE REOPENING PHASE
OF THE PANDEMIC WHEN THE
ECONOMY HAS SHOWN A LOT OF
STRENGTH.
I WOULD SAY IT’S TWO FOLD.
THE PATH FROM HOUSING TO
BUSINESS SPENDING TO
MANUFACTURING TO BANK LENDING
IS CONSISTENT WITH THE
SLOWDOWN.
IT MAKES ME COMFORTABLE WITH
THE OUTLOOK OVERALL BUT I THINK
THESE EVENTS REPRESENT DOWNSIDE
RISK TO THE ECONOMY.
THERE ARE WORLDS IN WHICH THE
FED HAS TO SHIFT TO
PRECAUTIONARY RATE CUTS AS IT
HAS DONE IN THE PAST.
WE WILL SEE.
IT MAKES ME FEEL COMFORTABLE
WITH WHERE WE ARE.
JACK OTTER: THE FED’S ORIGINAL
MANDATE IN THE EARLY PART OF
THE LAST CENTURY WAS STABILITY
IN THE FINANCIAL SECTOR AND
THAT IS A REAL ISSUE.
HOW DO THEY FIND A BALANCE
BETWEEN NOT WANTING A RUN ON
THE BANKS BUT ALSO NOT GIVING
BANKERS AND OPEN-DOOR TO TAKE
RISKS BECAUSE THE FEDERAL
GOVERNMENT WILL BACKSTOP IT.
>> GOOD MORAL HAZARD ARGUMENT.
FIRST AND FOREMOST YOU HAVE TO
RESPOND TO EVENTS IF YOU THINK
THERE IS A SYSTEMIC RISK AND
THAT IS WHAT THEY HAVE DONE.
THAT WAS THE FED’S ORIGINAL
MANDATE.
I DON’T WANT TO MAKE THIS
OVERLY LITERAL.
IT IS GOOD THE SHOCK HAPPENED
TO THE BANKING SECTOR, THE FED
IS GOOD UNDERSTANDING THESE
ISSUES AND HAS THE TOOLS TO
FIGHT THEM DIRECTLY IN THE
EXPERIENCE.
THERE’S EXPERIENCE THAT SHOULD
HELP US OUT.
EVERY TIME WE DO THAT IT RAISES
THE RISK OF MORAL HAZARD.
WHAT WILL LIKELY BE COMING DOWN
THE ROAD IS ADDITIONAL
REGULATION, TO SOME DEGREE THE
REVERSAL OF ROLES IN 2018 THAT
REDUCED THE TORY BURDEN BANKS
WITH $50 BILLION TO 250 BILLION
IN ASSETS SO YOU COME BACK WITH
MORE REGULATION AND HOPEFULLY
ENSURE THE INCENTIVES BETWEEN
BANK OWNERS AND SHAREHOLDERS.
JACK OTTER: THEY MISSED IT THIS
TIME.
ONE MORE QUESTION, A FEW
SECONDS LEFT.
IT SEEMS THERE ISN’T MUCH
REASON TO GO WITH THE SMALL
BANK RIGHT NOW.
IF I HAD A BIG PAYROLL I MIGHT
THINK I MIGHT PUT THAT WITH ONE
OF THE TOO BIG TO FAIL BANKS.
IS THERE A DANGER MONEY WILL
FLOW AT THE SMALLER ISSUES?
>> YOU COULD ARGUE HIGH YIELDS
ON MONEY MARKET MUTUAL FUNDS
ARE CAUSING DEPOSIT OUTFLOWS
AND RECENT EVENTS COULD LEAD
DEPOSITS TO FLOW TO BIGGER