The FOMC’s Big Tug-of-War

May 2, 2023

Big day tomorrow!

As you read this the members of the Federal Open Market Committee are locked behind closed doors pouring over reams of economic data, analyzing the extrapolated trends and shaking their Magic 8-Balls all looking for indications on where inflation is going. 

Those Magic 8-Balls will be working overtime because they’re caught between two big opposing forces…

Problem No. 1

Earlier in April, the CPI showed a 5% rise in prices year over year.  That was the ninth straight month of “disinflation” — a slowdown in the increase of prices — which is promising. Taking out the ever-volatile food and energy components and core inflation actually saw an uptick to 5.6%.

What this means is that prices in the food and energy sectors are cooling off faster than the rest of the economy. Put another way, the rest of the economy is still dealing with some pretty bad inflation. 

Put yet another way… Inflation is still way too high.  

More recently, the first guess of Q1 PCE prices (the Fed’s pet inflation calculation) came in at a scorching 4.2%. That was versus 3.7 in the fourth quarter of last year and versus a forecast of 1.4%.

The monthly number — which is slightly more relevant — came in at 4.2% (down from 5.1%) but the core number is still showing some persistent inflation sticking at 4.6%.

If they raise funds 25 basis points tomorrow they will have raised rates 500 basis points (5%) in 10 consecutive meetings. I can’t remember when that’s ever happened before. 

And given that they still haven’t reined inflation in, it’s safe to say, Iike I and former Fed governor Lael Brainard have been, that the Fed’s monetary tools are pretty much useless against this bout.

So they haven’t cured the inflation problem yet. But there is something they have done.

Problem No. 2

Banks are under the microscope.

A mere month ago, two regional banks failed. One of them, Silicon Valley Bank (SVB), was the second largest failure in history. A third bank, First Republic (FRC), had its credit rating lowered four notches to “junk” status by S&P.

They knew what they were doing. 

Last week, FRC reported they lost $100 billion in assets — depositors asking for their money back. (Yesterday the news broke that the bank was taken over by regulators and sold to JP Morgan.) These incidents put the bank under some massive financial pressure.

First Republic Bank (FRC)


It’s not just FRC. The entire regional banking sector has come under pressure because many of the assets they bought with the massive pandemic stimmy deposits they received are now under water…

Thanks to the Fed’s rate hikes. 

Now there’s a little side note I shared with my paid subs in last week’s Streetlight Confidential. Big (TBTF) banks are seeing a drain in deposits along with their little regional brothers…

Source: The Federal Reserve Bank of St. Louis

The deposit flight from Club TBTF isn’t an immediate threat to the economy or financial system. JP Morgan Chase has nearly $3 trillion in deposits. But if the trend in the bigs continues and the regional sector continues to crack, the Fed may be looking for an excuse to…


Personally I’ve been calling for the Fed to raise rates to 6% and hold them there through this year. That is barring any unforeseen calamities. And a serious shock to the banking system might just be the calamity that pushes them into reverse.

But don’t worry, they have a plan for that too… 

They’ll simply find a reason to raise their official inflation target rate (if that sounds ridiculous, they’ve done it before), declare that inflation is now under control and start easing to save the banks.

The Fed is caught in a tug-of-war between inflation and a fragile banking system.

Look for 25 bps tomorrow anyway!

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily