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FINANCIAL PLANNING
THE FEDERAL
RESERVE, BANK
FAILURES & MORE
The United States economy has delivered a plethora of confusion over recent months. The Chairman of the Fed, Jerome Powell, is in an extremely difficult situation in deciding how aggressive to raise rates and how long it will take to worsen the economy. There have been bank failures and the stock market has struggled for the last 18 months. Real estate has started to correct as well. What do we
figure to around 2%. Where do they stand right now? Even with the significant rate hikes, inflation is still running at 6%, triple what their target is.
As I currently write this article, the fed announced another 25-basis point rate hike. Achieving their 2% target will not be a
fast process. In fact, it could take multiple years to do so. This does not mean that the
BANK FAILURES
Since my last article, the second largest bank failure in the history of this country occurred. That is not something to take lightly. As a financial professional, I’ve had dozens
of people ask me about Silicon Valley Bank (SVB). At our firm, Peterson Wealth Services, we have researched the collapse quite a bit.
We chalked it up to poor management by the
by Cade Peterson, Financial Advisor
make of all these negative impacts to our daily lives? How long will all of this continue? These are good questions to be asking yourself as
we try to navigate through the stormy waters of the U.S. economy. What you might fail to remember is that we have been here before. The economy has been worse than it is now, and we have had banks fail in prior years. It
is instrumental to have a plan in place. All good financial plans should account for down markets and struggles with the economy.
STATUS OF THE FEDERAL RESERVE
The Federal Reserve has been hiking interest rates very aggressively for the last 12 months. The cost of basic consumer goods hit a 40-year high, and the objective of the fed has been to reduce the year-over-year inflation
housing market and the financial markets will take multiple years to recover. When the unemployment rate begins to increase, you will start to see the tides turn. I would not assume that the fed will immediately cut rates once we do hear about more layoffs, but I do think, however, that the stock market will react in a positive manner. The question we continue to ask ourselves is: how much longer will the fed maintain their aggressive approach? I don’t anticipate that the fed will impose many more rate hikes. I can foresee one more 25 basis point rate hike and then a wait-and-see type of outlook. Some economists are calling for a cut of interest rates by the end of this year while others predict cuts will not take place until the beginning of 2024.
bank. It is easy to throw blame on the federal reserve for the interest rate environment, but
if you take a look at the bank’s balance sheet, you see very poor investment decisions. This bank was taking big bets with their excess reserves in long-term bonds and their client base was very concentrated in tech and crypto companies. Once their depositors heard of the unrealized losses in their bond investments, depositors stampeded in a classic bank run and siphoned over $40 billon in just a few short hours. “SVB’s failure is a textbook case of mismanagement,” said Michael Barr, the Fed’s vice chair for supervision.
Does this news on bank failures mean your bank is going to fail? Well, it kind of depends. I think there is a lesson to be learned from
this collapse. Not only by bank managers, but
84 SPEEDHORSE May 2023