2023-04-17 17:39:50 ET
Summary
- The news on Silicon Valley Bank and its problems came to the world on March 8, 2023, and things changed.
- It is interesting that three major financial markets changed direction that day and still seem to believe that in the near future, the Federal Reserve will "back off" raising interest rates.
- These markets are the foreign exchange market, the stock market, and the market for gold.
- Now we must wait and see whether or not the investment community is correct.
It seems to me that the bets are still on for the Federal Reserve to "back off" from making further interest rate increases. Maybe there could be one more, but investors seem to believe that the Fed will not do anything more this year.
Why?
Well, it seems to have to do with the banks that got in trouble in the first part of March 2023.
The Fed jumped in and keep the banking system sufficiently liquid.
The FDIC jumped in and expanded deposit insurance to all depositors and to all levels of deposits.
The U.S. Treasury Department got into the game, talking up the health of the whole banking system and promising support.
So, what happened to the markets to back up my claim that investors believe that the Fed will "back off" in its fight against inflation?
Foreign Exchange Market
Well, first off, the value of the U.S. dollar fell, indicating that investors believed that U.S. monetary policy would be relatively "looser" than the policies being carried out in Europe, England, and Canada.
Let's look at the dollar price of the Euro.
On March 8, 2023, it cost $1.0549 to purchase one Euro.
Then the cost of a Euro rose up until the present time.
March 8 is the day that it became known that Silicon Valley Bank of SVB Financial Group (SIVBQ) was going into bankruptcy.
The message from the foreign exchange market...the Federal Reserve was going to have to present a more lenient stance on its monetary policy, and, consequently, this would result in a fall in the value of the U.S. dollar.
Stock Market
The U. S. stock market also responded.
Note that the S&P 500 stock index (SP500) dropped on March 8, 2023, when the news of the SVB failure became known, but since right after the drop, the index has risen steadily up to the present time.
Investor attitude: the Fed was going to ease up on its monetary policy stance.
Price of Gold
My third measure here is the price of gold.
Here the price of gold hit a near-term low on March 8, 2023 of $1,818.60 per ounce.
From then on the price has risen steadily.
Last Thursday, the price of gold came very close to passing its historic high.
Again, investors reacted just the way they had in the foreign exchange market and in the stock market, and for the gold market, the timing is "spot on."
The Future
Right now, investors seem to be pretty much "in sync" with one another with respect to what they think the Federal Reserve is going to do.
But, where does that leave us with respect to the inflation that the Fed has been fighting?
Well, the rate of inflation has been coming down during the first quarter of 2023.
Will inflation continue to drop?
Some analysts look at the behavior of the M2 money stock over the past six months and argue that the decline in the amount of M2 money stock is another sign that the Fed has done its job and that inflation will continue to decline.
Therefore, it is reasonable for the Federal Reserve to stop raising its policy rate of interest and allow the "tight money" policy it had been conducting to ease off.
So, the investment community seems to be pretty well in line with what it believes will happen in the near future.
The unique thing in the information that has been presented above is the timing. March 8, 2023, the day the news on SVB came to us, changed a lot of thinking in the investment community.
And, up to this point in time, the "new" view seems to be holding in the markets.
For further details see:
Markets Say: Bet Still On That Fed Will Back Off Tight Monetary Policy