Page 10 - April 2023 Issue.indd

DOLLARS AND SENSE by Tolbert Rowe

If It Sounds Too Good to Be True, It Usually Is!

am going to stick my neck out higher interest rates can have to banks But, back to the basis of my inflation
this month and make a profound and other financial institutions. prediction. In order to understand

prediction that I am very confi dent the basis of my confidence in lower
When the bank needed to generate cash

will be correct. The Consumer inflation/CPI, you need to understand
because customers were withdrawing
I ice Index (CPI), which is the what this number is actually comparing
P
r
more cash than the bank had on hand,
primary indicator of infl ation will drop, and what it is being compared against.
they were forced to sell assets of which
possibly dramatically in June and July of
low rate treasuries were a part. These “The Consumer Price Index (CPI)
this year. Falling from a peak of 9.1% in
treasuries were sold at significantly measures the change in prices paid by
June of 2022, it will continue to trend
less than face value because at current consumers for goods and services. Th e
downward and will remain at or below a
rates of 4.5% to 5%, no one wanted to CPI is based on prices of food, clothing,
more reasonable 3.5% to 4% for the last
purchase them unless at a signifi cantly shelter, fuels, transportation, doctor
quarter of 2023.
discounted price. and dentist services and other goods
If my prediction comes true it only stands If a bank had $1 million in treasuries and services that people buy for day to
to reason that the Federal Reserve, ever yielding 1% the current value is day living”. This is directly from Bureau

vigilant in raising the federal funds rate significantly less so the bonds were sold of Labor Statistics News Release dated

since March of 2022, will be able to tap at less than face value as an incentive. February 14, 2023. Suffice it to say that

the brakes on interest rate increases. A $1 million bond paying 1% may sell there are lots of other components
And if all the stars align they may even for $500,000 or half what the bank paid such as family size, geographic area,
be motivated to lower interest rates in for it. retail establishments, profession of
2024 if a recession comes to fruition workers, etc., that are also taken into
later this year. Banks are required to keep a certain consideration.
percentage of their depositor’s money
Plus, as I write this in mid-March The Bureau of Labor Statistics (BLS)
the Fed will also have to manage the in the form of cash or liquid funds to be purchases a “basket” of goods and
complexities of the impact of the failure able to cover depositors withdrawals. services each month and looks at the
of two banks, Silicon Valley Bank and When these requests to take money out cost of these items in relation to what
Signature. It could be more by the time of the bank exceed the amount of cash they cost 12 months prior, this is called
you read this. the bank has on hand, the bank has to year to year CPI. Year to year CPI is the
scramble to generate cash by selling 800 pound gorilla that attracts the most
The failure and takeover of Silicon assets, borrowing from other sources attention and is the one that creates the
Valley Bank (SVB) and Signature Bank or raising additional capital by selling most angst for the market and attention
in early March was a shot across the stock. When none of these three options from the Federal Reserve in formulating
Fed’s bow that served as a warning of the work the bank fails and the Feds step in. monetary policy.
unintended consequence the impact that
CPI in February was 6% indicating that
the basket of goods cost 6% more than
in February of 2022 when the increase
in CPI was 7.9% higher than February
“Your Mortgage Consultant Since 1985”
of 2021. Let’s pause for a moment
Purchase or Refinance and reflect on these two numbers.
Technically we can conclude that if CPI
was up 7.9% in the year from February
2021 to February 2022 and it was up
6% in February of 2023 over February
of 2022 then the cost of the BLS basket
115 E Dover St. Ste 3 - Easton, MD of goods was 13.9% higher in the last
two years.
tolbert@baycapitalmortgage.com C. Tolbert Rowe,
www.baycapitalmortgage.com NMLS Vice President/Lending The Fed will also consider a less
182844
attractive and smaller 400 pound gorilla

410-819-3005 / cell 410-310-3520 when evaluating inflation and its impact
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