August 22, 2022 | Premium Service | In the almost 20-years that The Institutional Risk Analyst has been published, we can rarely recall a scenario for national finance that is more likely to end in tears. Market interest rates are rising and the Federal Open Market Committee has begun to shrink the system open market account (SOMA), some $9 trillion in Treasury debt and mortgage-backed securities (MBS). Dick Bove of Odeon Capital summarized things nicely last week:
“This week the Federal Reserve reduced the size of its balance sheet by a net $29.4 billion. This brings the 4-week total decline to $49.4 billion. These numbers indicate a serious intent to reduce the money supply. This is being done, I believe, because the Federal Reserve now understands that simply raising interest rates will not kill inflation. Shrinking the money supply will.”
Even as the investment community ponders whether Chairman Powell is really serious about inflation and, therefore, prepared to impose consecutive down quarters on the equity markets, the housing sector is cooling and more. Why diverting the income and gains from $3 trillion in MBS to the Treasury stimulates the economy is beyond us. Maybe somebody will ask Fed Chairman Jerome Powell at the September FOMC presser.
We’ve already talked about how the prudential regulators are forcing large banks led by JPMorgan (JPM) to raise capital and/or reduce risk weighted assets. Readers of The IRA no doubt noticed the announcement by Wells Fargo (WFC) that they are withdrawing from correspondent lending entirely. Banking aficionados will appreciate that the ghost of Norwest Bank has left the building, a reference to the aggressive merger partner of Wells Fargo & Co in 1998.