Let's take a listen to what the Federal Reserve I just had to say on CBS faced the nation and then what we're going to do is we're going to look at some world and Global reactions to what's going on in the financial markets. especially what's going on with China Where's all that inflation that we were supposed to be getting from China Some other impacts we've got. really great piece that we're going to go through right after we listen to Neil Kashgari on CBS. So let's take a listen here.

Add some commentary as a helpful here we go in: New York With these failed Banks doesn't Exist Elsewhere In the country, the banking system is resilient and it's sound. The banking system has a strong Capital position and a lot of liquidity and has the full support of the Federal Reserve and other Regulators standing behind it. Now I'm not saying that all of the stresses are behind us. I Expect this process will take some time, but fundamentally, the banking system is sound.

This process. What do you mean by that? Well, when when tensions flare up in the banking system and stresses emerge, uh, we often hope that they'll be resolved very very quickly. Sometimes it takes longer for all the stresses to work their way out of the system. So we know that there are other banks that have some uh exposure to long-dated treasury bonds who have some duration risk as they call it on their books.

We also know that commercial real estate. There are a lot of commercial real estate assets in the banking sector and there are some losses that will probably work its way through the banking sector so that process will take time to fully become clear. But fundamentally, the banking system has a lot of capital to be able to withstand those pressures. One of the things I think is so great is that as treasury eels have actually plummeted over the last a few, uh, days here, Uh, through the banking crisis, the value of bonds that banks are holding has actually gone up.

So you're actually by having a banking crisis, you're creating less risk of the furtherance of the banking crisis. And you mentioned commercial real estate. Because so many of these mid-sized banks are lenders in that space. so that could impact.

Construction In other words, this could have a real impact on the economy. Does it tip us towards recession? Well, it definitely brings us closer. Right now. What's unclear for us is how much of these banking stresses are leading to a widespread credit.

Crunch And then that credit crunch? You're right. Just as you said, would then slow down the economy. This is something we are monitoring very, very closely now. on one hand, such strains could then bring down inflation, so we have to do less work with the Federal Funds rate to bring the economy into balance.

But right now it's unclear how much of an imprint these banking stresses are going to have on the economy. You know what I think is so remarkable is that back in January of 21, we looked at history and history gave us this remarkable outline. It said look, if inflation is high, force a recession and inflation will go away. When people actually internalize that we're in a recession, what do they do? They spend less money and so either the velocity of money goes down, the total spending goes down total GDP goes down.

Whatever it takes, forcing a recession is a fantastic way. Well, I shouldn't say it's a fantastic way because it's somewhat painful. but it is a way to solve inflation. That's because you're what you're really doing is you're reducing demand.

Now there's the other argument that you could just accommodate Supply more, but that's much more difficult. The FED can't really do much to affect Supply Congress can. but who really thinks they can actually pull something off here? So far, all they've been doing is pulling off stemi checks for chips and EVs and Energy Products Which hey, fine with me because I've got a bunch of stock in this, but it's something to watch very carefully and that's what we're focused on. And Chairman Powell said as much this past week at the Federal Reserve that that tightening and credit might be doing your work for you in terms of slowing down the economy.

Does that mean it would make Neil Kashkari hit the break on rate hikes at your next meeting? Well, we have to see you know right now, the stresses are only a couple weeks old. There are some concerning signs. The positive sign is uh, deposit outflows seem to have slowed down. uh, some confidence is being restored among smaller and Regional Banks Uh.

at the same time we've seen the capital markets have largely been closed for the past two weeks. If those Capital markets remain closed because borrowers and lenders remain nervous, then that would tell me. Okay, this is probably going to have a bigger imprint on the economy, so it's too soon to make a new forecasts about the next interest rate meeting that we have the next Fomc? Yeah, and I'll tell you. We're going to go through some reports here in a moment on what some of the reactions have been to this banking crisis in terms of tightening lending standards and spoiler alert.

It's not seemingly to be that big of a deal, but we'll talk about it with some reports in a moment meeting. but these are the factors that I'm going to be most focused on. You know when it comes to confidence among Americans in the system right now? CBS News Just recently did a poll and only 15 percent of people pulled by us said they had a lot of confidence in the Federal Reserve's ability to manage these banking issues. Why should the public trust the FED Now when this risk to Banks was missed out in San Francisco in New York And when the Fed was late to the game on catching up with inflation, you know the covet pan pandemic has thrown some curveballs at us that none of us have experience in any of our lifetimes and it has taken us time to catch up and figure out exactly where the economy is headed.

The interest rate risk that brought down Silicon Valley Bank is something that we've all been very focused on. We've been communicating it to Banks all across the country for the last couple years that interest rates are going up and most banks have done a much better job of managing their risks in advance of those interest rates going up. And so there's still uncertainty in the economy. There are still stresses.

You have a group of people at the Federal Reserve who are totally committed to our mandates to committed to achieving the public service responsibilities that we have, and we're going to continue to let the data and the evidence guide us. And that is the best reassurance that I can give. Is that a lot. a group of people are non-partisan focused on doing their very best on behalf of the American economy and American households.

You know. What's interesting is that you actually have an incentive as a bank not to hedge your Cur your uh, interest rate risk Because when you hedge your interest rate risk, you have to take an expense. When you take an expense, it makes your earnings per share look lower which makes it look like you're not performing as well as a CEO of the company. Well, the reality is you're actually protecting the company.

but if instead of taking an expense on hedging risk, you could just take your losses and your your basically your bags and hide them under hell to maturity. Securities then you don't have to book a dime of losses. Oopsie-doopsies That's exactly why you get some of this uh, drama unfolding uh at uh base like Silicon Valley Bank Because people are scratching their ads going. Why? Why did you not book any kind of Hedge events? Oh well, because that would make your income and expenses look less profitable and you were incentivized via stock options or bonuses or whatever to have the most profitable p L So maybe there's some accounting reform that some folks are now calling for because the the incentives are very skewed for banks.

But we're about to see the first hearing on Capitol Hill this week about what just happened. But there were flashing warning site warning signs out there at Svb Bank the Silicon Valley Bank in the months leading up to its failure on this program just earlier today. Senator Warner of Virginia who's on the Banking Committee said The Regulators Missed Basic Banking 101 The interest rate mismatch. How could that risk have been so missed by The Regulators at the Federal Reserve in Washington and in San Francisco Well, I don't know any specifics about the Svb case because they're not regulated by the Minneapolis Fed and I know Vice Chair Bar is conducting a rigorous review to understand exactly what happened.

It has been publicly reported that the Federal Reserve did take action specific to Svb to get them to address these exposures. I Don't know more than that and I'm looking forward to Michael Barr's review and his findings, which we're all going to take very seriously. I Can tell you at the Minneapolis Fed, we have conversations with our bank supervisors and then with the banks about these risks all the time. Doesn't mean that we're not going to make mistakes, doesn't mean that we are perfect, but I know across the Federal Reserve that bank supervisors have been focused on these very exposures since before the interest rate increases even began last year.

Well, just on this program last week. Senator Warren says she doesn't have confidence in Mary Daly the San Francisco Fed president. Do you? I do I know Mary Daley Exceptionally well. I've worked closely with her for the last several years.

She's an outstanding public servant committed to helping all of us fulfill our mission for the public. Nonetheless, we have to look at the findings that Vice Chair Bar comes out with. Take those findings very seriously. All right.

we're going to back off that and get into Uh some of the Uh impacts that banks are expecting and analysts and financial markets are expecting. You know, Kashgari doesn't go on to say much more after that. So one of the first things that I'd like to understand is how much do we actually think this banking crisis is really going to hit the economy? Uh and uh. And that's a big deal, especially looking at sort of GDP hey, what? what do we think in terms of GDP Uh.

And so there are a few different analyzes. Morgan Stanley provides one. Morgan Stanley suggests that credit shocks will take a toll on the economy, but it will take time to figure out how large those effects could be. However, in their estimates, we think that this pullback in Bank lending, which was already underway, we were already seeing tightening and lending standards.

This pullback could end up shaving off about 10 basis points from GDP That's a belief from Morgan Stanley. However, these effects could end up taking a lot longer to play out. They actually think the largest impacts could be felt around Q4 of 2023 and Q1 of 24.. This kind of leads to this idea that maybe we have to be more patient with when we actually think the impacts of all of this hiking and the credit squeeze will actually come.

Patience is probably the biggest thing that I've learned in this cycle, especially I Think we we all had this memory out of Covid, or even how quickly uh, bailouts were instituted in 2009, we had this more recent memory of quick actions from The Fad quick actions Uh, you know you had the September crisis in 2008. By February of 2009, the Fed was running the money printer right in in 2018. As soon as there was a slight sign of Market stress, the FED turns around runs the money printer covet pandemic. It wasn't even a matter of a few months, it was a matter of a few weeks before they started writing the Monday printer.

So this this idea of of the the fed you turning is taking a lot longer. and because of the inflation that we're seeing now which hopefully ends up proving to be dare I say the word transitory, but take a look at Goldman here. Goldman also gives a projection a little bit further out. Goldman suggests that we could see a tighter credit reduced GDP by around four tenths of a percent.

That's about four times as much of the impact that Morgan Stanley thinks. Uh, but you could kind of make sort of a range here and suggest that it looks like analysts are thinking somewhere between 0.1 to about 0.4 To the negative on GDP is what we might expect from tightness here as a result, results of these banking failures. But anyway, they suggest that we're probably looking at seeing this. This hit somewhere around the fourth quarter.

So again, another analysis where maybe that hit just doesn't come as quickly as we think uh and uh and it's unclear obviously how much that hit will be Bank of America talks about uh, funding risks uh as well a little bit of that credit Suite squeeze Uh, they do talk about some of the stabilization that we're seeing in in banking since then, but also Bank of America thinking somewhere around a 25 basis point hit to GDP when it comes to credit tightening. So when you combine all three of these, Morgan Stanley Goldman Sachs Bank of America Clearly, the hit to GDP is probably going to be somewhere between 0.1 to about 0.4 Now what's crazy about that is if we actually look at the summary of economic projections that the FED just gave us, they just lowered their forecasts for GDP uh from 0.5 to 0.4 Now the fascinating part about that kind of hit is taking us to 0.4 if we end up getting hit with a 0.4 reduction like Goldman Sachs estimates. but well, then oopsie Doopsie, you might be right there at zero or even slightly negative. And that's where that recession is.

So recession time are still looking like Q3 to Q1 in that range. This certainly does as Neil Keshkari said it. push us closer to that and you can see when you look at the data fed thinks we're at a 0.4 GDP is how we end the year Morgan Stanley Bank of America Goldman Altogether think we're gonna have a hit of somewhere between 0.1 to 0.4 percent because of the banking crisis we're knocking on the door. Recession: Could we be flat? Hey, taking flat is actually okay in a weird way.

if you're flat and non-negative you're not in a recessionary environment, so that'll be quite fascinating to see play out. Uh, but uh, look I think they're they're This is leading a lot of people to call for the Fed to pause by May That's the next time we actually see from or hear from the Uh Fed. And so we can look at right monitors to see what expectations are now. but no going into May These are where estimates estimates are likely to be quite uh fluid for a while.

For example, you've got a one Economist suggesting hey, uh, this is this is. let me see. where did I write his name I Just have his citation over here I wanted to reference him by name I lost this citation anyway. while I look for it, he's talking about how important it is for the FED to actually pause.

Uh, here it is. It's Uni Credit. An analyst over at Uni Credit says the FED should definitely Pause by May to make sure we have plenty of time to play out. Uh, the implications of this credit tightening from the banking sector.

Now if we look at the Fed rate monitor, it looks like we have a 38 likelihood of getting another 25 BP hike and a 62 percent likelihood of a pause right now, which a pausing right now would somewhat align with what Jerome Powell hinted in the last press conference where they had even started to talk about the idea of a pause. It's the first time Jerome Powell has ever mentioned a pause in this tightening cycle, and that was talked about at the last meeting. It was talked about at the last press conference, and it's actually now more priced into markets than not. Obviously, markets are pricing in cuts.

By the end of the year of around 100 basis points, the FED says we're not pricing in any of those sorts of cuts, and that's likely because if the FED starts talking about Cuts then people might start spending, stocks might start taking off. Financial conditions might loosen and they could basically hurt the status quo where we are now. In other words, if the status quo stays stable right now, everything stays status quo. Right now, everything stays stable, then potentially inflation goes away.

But if the FED says we're going to the Moon boys girls, that could have the opposite effect and actually re-ager re-aggravate uh, inflation. So I think those are some of the concerns that Federal Reserve is playing with right now to someone manipulate potentially what's happening in markets Now, we do have catalysts that we want to pay attention to this week as well. There are quite a few, specifically the Fed's preferred Inflation Gauge Pce before. I Talk about the Fed's preferred inflation gauge.

It's worth noting we do have earnings coming up this week as well. Carnival Cruise Lines This morning Walgreens Tomorrow morning with LoveSac Dave and Buster shift Lulu After the Bell tomorrow. uh, that's Tuesday Restoration Hardware Wednesday After the bell and on Thursday we'll get Blackberry and Canoe. We do have quite a few data points coming out as well.

Let's take a look at Barclays They give us a nice little sum up here of the various different catalysts that we're going to be looking for. So today we'll have Uh Fed Governor Jefferson a new Fomc voter discussing monetary policy at an event at 5 PM Eastern That's after the market closes, we'll have wholesale inventories coming out on. Tuesday You can see the projections right here. The forecast is for a growth of inventories of one tenth of one percent Advanced Trade These are tomorrow's catalysts here.

Fhfa Federal Housing Administration Over here numbers. We'll get those tomorrow. Okay, Schiller 20 City index for housing prices Expected to actually come in at negative a 0.6 year over year. So your first slight negative on the S P K: Shiller here starting to get that year over year lapping.

Uh, keep in mind, even the treasury yields have followed mortgage yields. Mortgage rates have been pretty stable, mostly because spreads risk spreads have widened on mortgages. Probably because banks are dumping Mbs's to try to increase their liquidity positions anyway pending home sales. Wednesday Thursday We'll get a real GDP Uh, the expectation is about 2.6 percent for GDP we'll get initial jobless claims looking at looking for 195.

Barkin will speak at an event on Thursday at 12 45 at the same time as Collins a non-voter will give a speech. so we'll get a voter and non-voter on Thursday it's a little bit of fed speak here. And then here's the important set and this is Friday We'll be covering this live when the data comes out, but we're getting. We'll be getting the personal consumption expenditures read on inflation.

That read is expected to come in at 0.3 percent. Uh, that is the Barclays forecast. The consensus though is point Four percent and the the latest report was actually 0.6 so we'll hopefully see some softening over here on PC Uh, the closer comes into Barclays At point Three, the better Point Three good. Point Four starts getting a little bit bad.

0.5.6 Not great. Remember, if you multiply these numbers by 12, you'll actually get your annualized figure. So if we get uh 0.3 we'll be sitting at somewhere around 3.6 Pce inflation which is much closer to two than obviously if you annualize 0.6 which comes in at 7.2 uh, you'll also be getting a core Pce also looking to match at about 0.3 uh. Consensus though on Wall Street is 0.4 University of Michigan estimates uh for inflation I Actually think I have the forecasts and the consensus for that.

Let me see here that would be Friday Friday Friday Friday Friday Friday Friday Friday University of Michigan Inflation expectations. We want to make sure they stay anchored. Very important they stay anchored. We do not want any kind of runaway of inflation expectations.

and the forecast for the 31st is uh, one year inflation expectations three point eight percent that's stable with the prior read as the forecast is 2.8 stable with the prior read for the one year out. Or sorry, that's the five to ten year inflation expectation. So we could fill these in right here. Uh, actually.

uh, the forecast matches the latest here, which is three eight and uh, two eight. uh for their forecast and consensus here. So uh, then we'll have uh, some more Feds speak as well. Look at all this Fed speak we get this week.

I mean a lot of different fed speak again. Let's just highlight the FED speak here. So you've got Fed speak at 5 Pm today. Uh Fed: Governor Jefferson Fomc voter new guy.

We've got uh, bar an Fomc voter here testifying before the house Financial Services committee on Friday This should actually be really interesting because Barr is doing the investigation into the banking drama so we'll be able to get some banking updates over here. Williams uh at Uh 3 P.M on Friday the market will still be open. then right at close, we'll get a Waller uh speaking at a conference and then cook uh speaking uh after the close on Friday as well for more of a dinner event. So this gives you a little bit of an update on sort of where the Fed's head is.

Obviously, the Fed's head is likely to be in wait and see mode. We don't actually get another Fed Catalyst until the May event which is May 3rd. Now, interestingly, that'll be right between uh two CPI releases. So you're going to get the March data on April 12th.

So mark your calendar for April 12th and then the next CPI release won't be until May 10th, which will actually be about a week after the next Fed press conference. Then you're going to get the Uh Jobs data at the beginning of May as well, and the beginning of April here coming again. So mark your calendar for April 7th for the next jobs data and then the next jobs that after that doesn't come out until May 5th which is again after the next Fomc uh press conference on May 3rd. Now that's interesting.

That means the next CPI on April 12th and the next jobs report on April 7th will actually be the only New pieces of data we get. Uh, the larger two pieces of data. There'll be a lot of miscellaneous reports, but in terms of CPI and jobs, those will be the only two reports we get before the May Fomc meeting. Which means the next jobs and the next CPI report will actually be on the 7th and 12th will be pretty important for trying to predict what the FED is going to do come May 2nd.

so pay attention to that as a catalyst. So with that update on the Federal Reserve it is worth reminding you to check out life insurance that you can get in as little as five minutes via the link down below. uh, that is sponsored. Uh, argument here is Zang Hey, if you don't have life insurance yet, you should consider getting it.

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