Latest / Markets with Megan: A Quick Financial Markets Update / Fed Testimony Breakdown: Rate Cuts, Inflation Focus, and a Basel III Surprise | Episode 109 | 03-07-2024

Transcript

Fed Testimony Breakdown: Rate Cuts, Inflation Focus, and a Basel III Surprise | Episode 109 | 03-07-2024 · Markets with Megan: A Quick Financial Markets Update

• 0:02
  Speaker 1: Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, coming to you today, on Thursday March 7th, with our regular segments of Markets with Megan, and we want to talk about the Federal Reserve's semiannual testimony that they gave to Congress.
• 0:16
  Speaker 1: This has happened over the past two days, so we wanted to kind of give you a summary of what's happened and some of the surprises that we saw in this testimony.
• 0:24
  Speaker 1: First of all, from an interest rate perspective, there really wasn't anything shocking in this.
• 0:30
  Speaker 1: They basically left the door to be able to do either raise rates or cut rates.
• 0:35
  Speaker 1: But they did say that if everything develops the way that they're looking, that they should be able to cut rates at some point this year.
• 0:42
  Speaker 1: They didn't say when most of the expectations now are for a June rate cut, but again, this is highly fluid and highly dependent on what we see with the inflation environment.
• 0:52
  Speaker 1: The other thing that they did talk about a lot was inflation, the pressure that it has on the citizens, and again they are just strictly sticking with their mandate, trying to get it down to that 2% target.
• 1:06
  Speaker 1: There was some concerns from different congressional leaders about housing, and this is not surprising, giving that affordability is at a record low and that's because prices of homes right now are at a record high and interest rates are still elevated.
• 1:19
  Speaker 1: So home buyer affordability is very, very weak.
• 1:23
  Speaker 1: But the one thing that Fed can't do even if they cut rates, they can't fix the supply in this country and we are in a structural shortage of homes right now.
• 1:31
  Speaker 1: They can open up some people possibly wanting to sell their homes if interest rates do come down, but we do need more inventory to come on market before we can really call some a fix here to the housing market.
• 1:44
  Speaker 1: The biggest surprise out of this testimony was the change in tone on Basel 3, and we haven't talked about it too much on these podcasts.
• 1:53
  Speaker 1: But Basel 3 is what they call the end game.
• 1:56
  Speaker 1: It's the final implementation of financial regulations to take place after the Great Recession.
• 2:02
  Speaker 1: So remember, after the Great Recession, a significant amount of regulations were put on banks, but this Basel 3 is now actually putting another layer of pressure on banks, not only to improve regulation, supervision, risk management, but it's also what their goal is to reduce that systemic risk in the banking sector, specifically in the large banks, what we are concerned about and what the many, many bankers have said in their comments to the Federal Reserve and the other regulatory authorities is that this is going to put pressure on an area of the economies that's already highly regulated.
• 2:41
  Speaker 1: They want another layer of rainy day funds for banks.
• 2:44
  Speaker 1: They want new leverage and liquidity ratios at higher levels.
• 2:48
  Speaker 1: This is something that we think can weigh on economic growth, and the reason why this is coming to light now is because typically it's the banks that put in comments when they have this open period to make comments on new regulations in the banking industry.
• 3:02
  Speaker 1: But this time it was joined by not just banks, but you had pension funds, you had climate activists.
• 3:08
  Speaker 1: All of these groups are concerned about the economic impact this can have on businesses and lending in the economy, especially at a time when the economy is starting to soften.
• 3:18
  Speaker 1: So the Fed kind of did a pivot and they're now reevaluating and said that they are willing to take a look at this Basel 3, make adjustments and even go as far as rewriting the entire thing.
• 3:28
  Speaker 1: So what we think is a positive from an economic standpoint that they're open to those suggestions, but again, there's a long way to go with that.
• 3:35
  Speaker 1: They're just open to this.
• 3:37
  Speaker 1: There's been nothing set in stone, there's been nothing said, there's been no proposals, but this is something that has been a change and shift in from the agency perspective.
• 3:46
  Speaker 1: That's all we have today.
• 3:47
  Speaker 1: Tomorrow is a big day with the jobs report.
• 3:50
  Speaker 1: We'll be back to give you some more information about that and if you have any questions or comments, please feel free to reach out to podcast at Verdence dot com.
• 3:56
  Speaker 1: Thank you.