Fed’s Fading Pivot

by | Apr 17, 2023

Fed pivot hopes continue to fade.

A month ago, Fed Funds Rate futures contracts favored a pause at the current 475-500 bps target rate for the next Fed meeting in May.

Today, a 25 basis point hike to 500-525 is nearing 90%.

And the likelihood of another 25 bps hike on June 14 have gone from a mere 3.6% to over 25%.

The markets aren’t getting what they want from the Fed. And as long as data keeps coming in hot like today’s Empire Manufacturing number, you can push any rate cut hopes well off into next year.

This is horrible for banks, mind you. Though for the conspiratorially minded among you, “horrible for banks” plays perfectly into this theme.

With the Fed pressing higher, the long-term earnings impairment all banks now face keeps getting longer. But the only true driver of banking’s future is continued near-term deposit flight.

Big Banks on the receiving end of last month’s deposit flight can’t afford to keep them.

Deposits will keep leaving the system. Big banks will have no choice but to dispose of assets like bonds and loans to pay those depositors. The Federal Reserve will have no choice but to step in and provide a more permanent home for those assets.

And the all-encompassing bank failures that sweep across the U.S. will mark the end of the Dollar-Dominated Era.

Take What the Markets Give You.

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