Given your deep experience, both in monetary policy making and in the
banking sector, put the events of this weekend in context.
And when do you think we can breathe a sigh of relief?
Well, I hope this week we can breathe a sigh of relief.
UBS is the announcement of the acquisition of Christie's Swiss is
certainly going to court should calm the fears of a global banking crisis.
What I'll be watching this week is whether there are more pressures on the
liquidity of mid-sized and regional banks in the United States that would
conceivably keep this. I'll call it a mini crisis brewing for
the next few days. So that's, I think, going to be my
focus. But it's a good announcement over the
weekend. Dennis, of course, this now gets us
right to Wednesday when the Federal Reserve announces its decision on rates
to three weeks ago. Jay Powell signaling the possibility, if
not probability, 50 basis point hike. Some are saying no to 25.
Someone say some they say they shouldn't have at all.
Amidst all this financial uncertainty, what do you think they will do and what
should they do? I think that the options have narrowed
to two options. One is a 25 basis point hike,
effectively staying the course in attacking inflation, and the other is a
tactical pause. I call it tactical because I don't think
it should be interpreted as somehow withdrawing from the inflation fight.
Rather, it should be interpreted as not adding any fuel to whatever they see as
a financial stability risk. And so I think those are the two
options. I think it's a very tough call, frankly,
partly because we don't know what the internal assessment of the financial
stability concerns really looks like going into the week.
At this stage, I am inclined to give a majority probability to a 25 basis point
hike, but a non-trivial probability to a pause.
And I really it's it for me. It's a very tough call before the
meeting. Nomura last week suggested that the Fed
not only would cut their rate, seems even less probable now, but they did
raise the possibility of Pandit causing a quite positive quantitative
tightening. I had trouble getting that out, didn't
I? Maybe because it seems like such a big
step to take, because they think that removing liquidity when liquidity is
needed right now. What do you think?
They'll harbour that possibility? It makes sense to do that.
Well, I think it's one of their options. And I can see a logic in simply pausing
quantitative tightening because it's so widely viewed as removing liquidity from
from the financial system overall. At a time in which liquidity of
individual banks is a big issue. So, you know, it would be sort of a
symbolic move in some respects. I don't think 90 billion a month is
going to make a difference greatly one way or another to the liquidity of the
banking system. But I do think it would be consistent
with trying to do something to help restore stability.
Then as all of this came about as an unintended consequence of the fight
against inflation, is there a way that this could have been avoided in the way
that the Fed and other central banks navigated that battle?
Well, I think you have to go back and and accept that the Fed misread the
inflation risk for quite some time and then pivoted in March of last year and
raised rates very, very rapidly. Perhaps if.
Taking some bank management teams a little bit by surprise and so it might
have been avoided if the inflation fight had started earlier.
It had gone more gradually and even though it was extremely well telegraphed
and signaled by the Fed, perhaps see they could have done even more to
prepare the banking system for a rise in the policy rate and therefore the
interest rate levels. So then is how will Chair Powell have to
navigate communication this week? Because, of course, we know that just a
few days ago he had actually put more tightening on the table.
And this is also coming when people around are saying that this is not the
right time to blink, that this could actually make things much worse if he
actually does not go ahead with what markets are expecting already.
He always has a tough communications challenge.
I think he performs extraordinarily well in meeting that challenge.
This week is a particularly tough one to navigate because essentially the Fed has
two fights on his hands. It has the inflation fight, which has
been ongoing for for many months now. And it has this new financial stability
set of concerns. And he cannot
favor one over the other. He's sort of got to make sure that he is
constructive in trying to deal with both at the same time.
And I just think and to some extent, you know, they are opposed.
And so I think it's a tough communication challenge he faces.
OK, Dennis, I'd like to get to the very quick question.
I know my Heidi would as well. So just quickly, did regulators make big
mistakes with Silicon Valley Bank Powells being criticized there, being
dragged over the coals verbally on TV? Did they make mistakes?
I don't know the details. Are you?
Nobody has disclosed yet sort of what the cadence of communication between the
regulators, supervisors and the bank management was leading up to this
crisis. Certainly, I think some aspects of the
regulatory approach have to be revisited and rethought.
But I think we'll wait to hear basically line and verse actually what happened
and what regulators had been communicating.
What do you see in the differences in banking crises past?
Right. 1972, 1984 and some of those lessons
learned because is there a fundamental juncture at this point where you ask, is
the Fed's ultimate pursuit of financial stability?
Is it a bigger risk when it comes to inflation or is it a bigger risk to that
coming from the banking system? I'm not sure I totally understand your
question, but the. First of all, I think if the banking
system becomes very cautious, which is fairly likely, I think if particularly
if this pressure continues, then that is likely to lead
to a softer economy and therefore actually will help in the short term.
The Fed's efforts to slow the economy. The real risk is if it persists and
there's contagion and it becomes a much more severe downturn than was ever
expected or ever intended, that would and that would be an undesirable
outcome. So you have the little bit of the
unusual situation that if this is containable and it's just an episode and
and it creates a little bit more caution on the part of banks, not necessarily a
bad thing for what the Fed is trying to engineer, but if it gets out of hand,
it's clearly a bad thing. So, again, that's the communication
navigation that power is going to have to
undertake. On Wednesday afternoon.