March 28, 2023
Markets were recently upended by the failures of Silicon Valley Bank and Signature Bank, which have led to concerns about the viability of other banks. The stress seems to have occurred as a result of losses on securities held by the banks, which had to be realized as clients withdrew their money. For the most part, the securities held by banks are not risky, as they tend to be largely made up of US Treasury securities and mortgage-backed securities (MBS). Even though these securities tend to be among the safest investments, the rapid rise in interest rates over the past year has resulted in losses for some of them.
While few people likely expected this to occur, it is not a surprise to us that parts of the economy have started to show signs of stress. It is commonly said that when the US Federal Reserve aggressively raises interest rates, something eventually “breaks.” The chart shows the federal funds rate over the past 50 years. We have noted the times when something ultimately “broke.” As you can see, aggressive Fed rate hikes have typically coincided with significant economic disruptions.
Will we see more disruptions? Only time will tell. However, in our view, the aggressive pace of the current Fed tightening cycle and the history surrounding rate hikes should not be ignored.
Federal funds rate and economic disruptions
Note: Shaded areas of the chart indicate periods of recession.
Sources: Macquarie, Macrobond, Federal Reserve Bank of Dallas, and US Federal Reserve.