Economic Sentiment Sours as Challenges Mount

Pervasive Economic Sentiment

The persistent decline in economic sentiment among Americans, spanning the last four months, is gradually shaping a narrative of economic unease. This pervasive pessimism finds its roots in the palpable surge in interest rates and the looming anticipation of an economic slowdown. The University of Michigan’s latest consumer sentiment index, unveiling a 5% downturn in November, starkly contrasts with the positive trajectory witnessed during the summer months. This emerging trend not only demands attention but also prompts a critical examination of the factors contributing to this sustained decline.

Varied Impact Across Demographics

A nuanced exploration into the dynamics of this economic downturn uncovers intriguing variations across different demographic segments, offering valuable insights into the multifaceted nature of the current economic landscape. Young adults and individuals with lower incomes stand at the forefront of this decline, experiencing a notable dip in sentiment at the onset of the month. In contrast, the top tercile of stockholders witnessed a commendable 10% uptick in sentiment, aligning with the recent upward swing in equity markets. This divergence among demographics adds layers to the understanding of how economic challenges manifest differently across various segments of the population.

Inflation Expectations on the Rise

Compounding the prevailing economic apprehension are escalating concerns about inflation, both in the short and long term. Projections for inflation rates in the upcoming year have surged to 4.4%, a significant leap from October’s 4.2%, reaching the highest levels recorded since November 2022. Equally disconcerting is the upward trajectory of long-run inflation expectations to 3.2%, a figure not witnessed since 2011. This unfolding scenario poses formidable challenges for the Federal Reserve, demanding a nuanced approach to effectively manage and control inflation in the midst of economic uncertainty.

Federal Reserve’s Conundrum

Against the backdrop of this sustained economic unease, Federal Reserve Chair Jerome Powell’s recent cautionary remarks introduce a layer of uncertainty to the unfolding narrative. Powell openly acknowledged the lingering uncertainty about whether inflation is on a trajectory aligning with the central bank’s 2% goal. His emphasis on the potential necessity for a slowdown in demand to effectively control inflation adds complexity to the Fed’s strategic considerations. While recognizing the strides made over the past year, Powell’s remarks underscore the delicate balance the Federal Reserve seeks in navigating the evolving economic landscape and addressing the concerns that linger among the American populace.

Market Response and Future Considerations

As the economic landscape evolves, the response from financial markets to Powell’s cautionary stance becomes a pivotal aspect. Recent shifts in stock indices and Treasury yields following Powell’s remarks indicate the sensitivity of the markets to the ongoing economic narrative. These market dynamics, coupled with evolving inflationary pressures, set the stage for a complex interplay of factors that will likely influence the Federal Reserve’s future decisions and strategies.

The Fed brings up interest rates for the 9th straight week

The FedOn Wednesday, the Federal Reserve continued its attempts to combat the high inflation with another rate hike.

This time, they raised interest rates by a quarter point.

Additionally, they addressed risks to financial stability.

The news

Despite the recent meltdown in the banking sector, investors and economists were wary of a potential quarter-point increase.

Federal Chairman Jerome Powell and legislators went into their second policymaking meeting of 2023 with an air of uncertainty due to the shifting landscape around the financial system.

In the past few weeks, the Fed’s initiative to bring down inflation had become difficult as several banks collapsed.

The situation led to the Fed working to balance a potential financial crisis as inflation continued to soar, and the labor market tightened.

A struggle on all fronts

When the meeting concluded, the Federal Reserve released a statement acknowledging the recent financial market dilemma was taking a toll on inflation and the economy.

However, officials expressed their confidence in the overall system.

“The US banking system is sound and resilient,” they wrote.

“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation.”

“The extent of these effects is uncertain.”

According to the officials, the Committee is still keeping track of the inflation risks.

The banking crisis

The recent banking troubles have instilled fears across the country.

Many fear that the central bank might overcorrect the economy and potentially lead the country into a recession.

Others are afraid that their actions could trigger more bank failures.

Meanwhile, prominent economists have urged the Federal Reserve to hit the brakes on the rate hikes.

Their calls for a pause can be partly attributed to rate hikes undermining the value of Treasuries and other securities, which have always been a critical source of capital for most US banks.

For example, when Silicon Valley Bank had to sell bonds quickly at a substantial loss, it went through a liquidity crisis that led to its collapse.

Former New York Fed President Bill Dudley offered his two cents, saying, “The Fed’s in a bit of a bind.”

“On the one hand, they should keep tightening because inflation is still too high and the labor market is too tight.”

“On the other hand, they want to make sure they don’t do anything to exacerbate the stress on the banking system.”

“There’s not really a right solution.”

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The rate hikes

Policymakers have made their decisions, and interest rates have increased for the ninth consecutive time.

They raised overnight lending rates to the highest level since September 2007, going from 4.75% to 5%.

Their actions send a clear message that right now, their top priority is restoring price stability.

It’s also important to note that the decision to raise rates by a quarter point was in complete accord.

Since June 2022, no policymaker has been against the decision for other similar decisions.

Additionally, they released their rate projections after their last release around December.

Projections have primarily aligned with previous forecasts.

Furthermore, the Federal Reserve is still anticipating more rate hikes as they expect interest rates to reach 5.1% by the end of the year.

With this in mind, the Feds expect another quarter-point rate hike before they decide to hit the brakes.

However, officials indicate that interest rates would likely stay high longer while they bring their projected Federal funds rate from 4.1% to 4.3% in 2024.

In March, Jerome Powell hinted that interest rates could move higher and remain there longer than previously anticipated.

With the current financial conditions, there might be less need to hold the rates higher to cool the economy and curb inflation.

Fed officials are projecting deeper economic cuts in the next two years.

Real GDP is a measure used for the economy, and it is forecast to grow by 0.4% in 2023, which is a step down from previous projections of 0.5%.

In 2024, officials anticipate the economy will grow by 1.2%, lower than the 1.6% expected in December.

Furthermore, Fed policymakers forecast unemployment dropping lower than expected by the year’s end – 4.5% from the earlier 4.6% in December.

However, inflation could go higher than expected.

Fed officials are projecting PCE inflation could go higher this year than the last forecast, from 3.1% to 3.3%.

Silicon Valley Bank blame game commences

Silicon Valley BankThe initial shock of the SVB collapse has faded away, and the blame game has begun as people look for the guilty.

The tech industry is blaming Silicon Valley Bank CEO Greg Becker.

Many blame Becker for allowing the company to become the second-largest US financial disaster in history.

According to an alleged SVB employee, Becker publicly disclosed the bank’s financial difficulties before discreetly putting up financial backing to weather the storm.

The actions created the environment for the fear that led to people withdrawing their funds.

“That was absolutely idiotic,” said the employee. “They were being very transparent.”

“It’s the exact opposite of what you’d normally see in a scandal. But their transparency and forthright-ness did them in.”

The buildup

Greg Becker and his leadership team said last Wednesday night that they anticipated to produce $2.25 billion in cash from $21 billion in asset sales, resulting in a $1.8 billion loss.

SVB has made no firm pledges despite its best efforts.

The news shook Silicon Valley, where the bank has been a major lender to technology innovators.

Numerous business owners were terrified.

According to California regulator papers, several corporations withdrew $42 billion on Thursday, while Silicon Valley Bank’s shares fell by 60%.

As Silicon Valley Bank closed that day, it had a negative cash position of around $958 million.

“People are just shocked at how stupid the CEO is,” said the SVB employee.

“You’re in business for 40 years and you are telling me you can’t raise $2 billion privately? Get on a jet and fly to Kuwait like everyone else and give them control of one-third of the bank.”

While Silicon Valley Bank has yet to comment, CEO Greg Becker is claimed to have apologized in a video statement to employees.

“It’s with an incredibly heavy heart that I’m here to deliver this message,” said Becker.

“I can’t imagine what was going through your head and wonder, you know, about your job, your future.”

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Silicon Valley Bank officials, according to Jeff Sonnenfeld, CEO of Yale School of Management’s Chief Executive Leadership Institute (CELI), deserve to be admonished for their “tone-deaf, failed execution.”

In a joint statement, Sonnenfeld and CELI’s research director, Steven Lian, stated:

“Someone lit a match and the bank yelled, ‘Fire!’ – pulling the alarms in earnest out of genuine concern for transparency and honesty.”

Sonnenfeld and Tian said it was unnecessary to disclose the $2.25 billion unsubscribed capital offering on Wednesday night.

They noted that Silicon Valley Bank had sufficient capital in excess of regulatory requirements.

They also said that the $1.8 billion deficit was unnecessary to reveal.

The one-two blow, according to Sonnenfeld and Tian, sparked a massive frenzy, culminating in a rush to withdraw deposits.

They went on to suggest that the bank may have spaced the statements by at least one or two weeks, which would have lessened the impact.

On Sunday, President Joe Biden’s administration announced a rescue plan for Silicon Valley Bank depositors.

Biden also announced that the US government will undertake an extensive inquiry of all parties involved in the SVB catastrophe.

He released a statement saying:

“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”

The Fed’s involvement

According to Jeff Sonnenfeld and Steven Lian, Jerome Powell, the Chairman of the Federal Reserve and Biden’s choice to lead the Feds, and his colleagues bear some of the blame.

“There should be no mistaking that Silicon Valley Bank’s collapse was a direct result of the Fed’s persistent and excessive interest rate hike,” they wrote.

They stated that the Fed’s attempts to keep inflation under control affected two things:

  • The value of the bonds Silicon Valley Bank was relying on for capital
  • The value of the tech startups SVB catered

Silicon Valley Bank, on the other hand, had more than a year to prepare for and deal with the problems.

The anonymous SVB employee called the bank’s manipulation of its balance sheet “stupidity,” casting doubt on the CEO and CFO’s strategy.

But nevertheless, the employee, who is also a Wall Street veteran, believes the bank’s downfall was the result of mistakes and “naivety” rather than illegal activity.

“The saddest thing is that this place is Boy Scouts,” they said.

“They made mistakes, but these are not bad people.”


The Fed needs freedom to make hard decisions

The Fed: After prices have risen to levels not seen in decades, the Federal Reserve attempted to control inflation last year.

However, their efforts have run into complications since political meddling has limited the Fed’s authority to make decisions.

Jerome Powell, the chairman of the Fed, recently spoke on the subject.


Jerome Powell reiterated on Tuesday that for the central bank to effectively control excessive inflation, it must be free from political pressure.

Even if it leads to politically unfavorable criticism, the Fed Chairman informed Sweden’s Riksbank that stern measures would need to be taken to stabilize prices.

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” said Powell.

“But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”

“The absence of direct political control over our decision allows us to take these necessary measures without considering short-term political factors.”

At a meeting to discuss the independence of central banks, the Fed Chair remarked.

There was a question-and-answer period following the comments.


Jerome Powell’s speech included no references to the course that the policy will take this year.

In 2022, the Federal Reserve raised interest rates a record seven times, for a total increase of 4.25 percentage points.

The increases raise the possibility of more hikes this year.

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The Federal Reserve frequently makes choices that are harshly criticized.

Public officials’ grievances and critiques are nothing new, but Powell’s Fed has drawn fire from both political parties.

Prices increased under his leadership, which former president Donald Trump condemned.

Democrats like Elizabeth Warren, a progressive senator, have criticized the most recent interest rate hikes.

President Joe Biden has refrained from commenting on the Fed’s actions, stating that it is the central bank’s responsibility to deal with inflation directly.

Jerome Powell stated that political factors had not swayed him in spite of the allegations.

Calls for climate change

During his speech on Tuesday, Powell addressed the lawmakers’ calls to use the Fed’s regulatory authority to fight climate change.

Last year, he received letters from four top Republican House Financial Services Committee members.

The Republicans argued that the Federal Reserve shouldn’t control consumer demand or decide which businesses get more support.

Powell said that the Fed should continue on its current trajectory rather than deviate from pursuing perceived societal benefits that are weakly connected to their legal obligations and goals.

He asserts that the Fed’s request for large banks to evaluate their financial preparedness for climate-related calamities (such as hurricanes and floods) is the closest thing to climate-related activities they should be involved in.

“Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public’s will as expressed through elections,” added Powell.

“But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.”

“We are not, and we will not be, a ‘climate policymaker.'”

Climate program

A “scenario analysis” is being solicited with the inclusion of the six biggest banks in the US as part of a pilot program the Fed is launching this year.

An institution’s resilience to significant climatic disasters will be assessed through the analysis.

The test will resemble the so-called stress tests used by the Fed to assess how banks might respond to actual economic downturns.

The following banks are taking part in the exercise:

  • Bank of America
  • Citigroup
  • Goldman Sachs
  • JPMorgan Chase
  • Morgan Stanley
  • Wells Fargo


Throughout his remarks, Jerome Powell discussed central bank independence and maintained that the American people profited from it.

According to Powell, central banks’ independence empowers them to make difficult decisions.

“Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” he added.

Congress set the highest employment and price stability targets for the Fed and its staff to be independent and use its tools to carry out the goals.

“Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence,” said Powell.


The Fed is not a ‘climate-policy maker,’ Powell says

Powell says Fed might have to make unpopular decisions to stabilize prices

Federal Reserve Chairperson Promises to Fight Inflation

In a conference done on Thursday, the Chairman of the Federal Reserve, Jerome Powell, emphasized his pledge to continue with his fight against inflation, using an aggressive implementation of policies and mitigation measures to lessen the effects of the country’s economic downturn.

The 40th Annual Monetary Conference hosted by Cato Institute brought together experts and other officials to discuss fiscal matters of great importance to the country.

During the conference, Powell said, “The Fed has, and accepts, responsibility for price stability. We need to act right now — forthrightly, strongly.”

Powell has since informed the public of the robust measure the Fed will take under his leadership. In an annual symposium by the Jackson Hole last month, the Fed chairman said that the Federal Reserve is conditioning the public on the inevitable rise of the prices of commodities that could alter the spending habits of the citizens, including their income and investment habits.

According to Powell, the public might think that higher inflation in the country is supposed to be the norm. He justified that this mindset might be invoked by the failed attempts of authorities to control prices in the market. Further, Powell ultimately attributes this to the Fed’s inaction and unwillingness to impose tighter limits that could upend the skyrocketing prices of the country.

Powell’s belief that people are already thinking of inflation as a normal occurrence is affirmed by the Vice Chairperson of the Federal Reserve, Lael Brainard. “It is especially important to guard against the risk that households and businesses could start to expect inflation to remain above 2% in the longer run,” she said.

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The future of rates

Many investors are already expecting an increase in the basis points that will be set by the Feds during their policy meeting this month. According to them, at least a 75-point basis hike is expected. The increase will most likely happen even if the next release of the Producer Price Index and Consumer Price Index turns out better than expected.

“Their message is that we should expect them to remain in restrictive policy mode even after we start to see inflation data head in the right direction,” He went to pretty extensive lengths to dispel assumptions of any pivot coming forward soon,” said Keith Buchanan, Globalt Investments portfolio manager.

The Feds previously received raps after it has downplayed the looming inflation months ago. However, the agency’s senior officials have already apologized to the public and said that they have learned their lesson and will strive to thwart its effects.

“It would be sufficient for them to acknowledge that the near-term rate is trending in the right direction, but, definitely, they should not allow that to [influence] their trajectory. The real dilemma is, how much good data do they need in hand before they pause?” said Brad Conger, a deputy chief investment officer from Hirtle Callaghan.

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More work for the Feds

Apart from the current challenges the central bank faces, the possibility of low unemployment seems to exacerbate it. At the current time, the unemployment rate of the United States is experiencing the lowest since 50 years ago. In addition, Cleveland Federal Reserve Bank President Loretta Mester said that inflation has become the country’s key economic challenge now.

“Given current rates of inflation, I believe that the Fed has more work to do in order to get inflation under control. This will entail further rate increases to tighten financial conditions,” the president said.

During last month’s conference, Powell expressed the need to consider these factors.

“Our responsibility to deliver price stability is unconditional. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” the Chairman added.

Source: CNN