Raphael Stevens

Fallout from the U.S. banking crisis is likely to tilt the economy into recession later this year, according to Federal Reserve documents released Wednesday.
Federal Reserve staff gave FOMC members a presentation about potential repercussions from the failure of Silicon Valley Bank and other tumult in the financial sector that began in early March.
Though Vice Chair for Supervision Michael Barr said the banking sector “is sound and resilient,” staff economists said the economy will take a hit.

WASHINGTON – Fallout from the U.S. banking crisis is likely to tilt the economy into recession later this year, according to Federal Reserve documents released Wednesday.Minutes from the March meeting of the Federal Open Market Committee included a presentation from staff members on potential repercussions from the failure of Silicon Valley Bank and other tumult in the financial sector that began in early March.Though Vice Chair for Supervision Michael Barr said the banking sector “is sound and resilient,” staff economists said the economy will take a hit.”Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the meeting summary said.Projections following the meeting indicated that Fed officials expect gross domestic product growth of just 0.4% for all of 2023. With the Atlanta Fed tracking a first-quarter gain around 2.2%, that would indicate a pullback later in the year.That crisis had caused some speculation that the Fed might hold the line on rates, but officials stressed that more needed to be done to tame inflation.FOMC officials ultimately voted to increase the benchmark borrowing rate by 0.25 percentage point, the ninth increase over the past year. That brought the fed funds rate to a target range of 4.75%-5%, its highest level since late 2007.

The rate hike came less than two weeks after Silicon Valley Bank, at the time the 17th largest institution in the U.S., collapsed following a run on deposits. The failure of SVB and two others spurred the Fed to create emergency lending facilities to make sure banks could continue operations.Since the meeting, inflation data has been mostly cooperative with the Fed’s goals. Officials said at the meeting that they see prices falling further.”Reflecting the effects of less projected tightness in product and labor markets, core inflation was forecast to slow sharply next year,” the minutes said.But concern over broader economic conditions remained high, particularly in light of the banking problems. Following the collapse of SVB and the other institutions, Fed officials opened a new borrowing facility for banks and eased conditions for emergency loans at the discount window.

The minutes noted that the programs helped get the industry through its troubles, but officials said they expect lending to tighten and credit conditions to deteriorate.”Even with the actions, participants recognized that there was significant uncertainty as to how those conditions would evolve,” the minutes said.

Half-point hike if not for crisis?

Several policymakers questioned whether to hold rates steady as they watched to see how the crisis unfolded. However, they relented and agreed to vote for another rate hike “because of elevated inflation, the strength of the recent economic data, and their commitment to bring inflation down to the Committee’s 2 percent longer-run goal.”
In fact, the minutes noted that some members were leaning toward a half-point rate rise prior to the banking problems. Officials said inflation is “much too high” though they stressed that incoming data and the impact of the hikes will have to be considered when formulating policy ahead.”Several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook,” the minutes said.Inflation data has been generally cooperative with the Fed’s aims.The personal consumption expenditures price index, which is the inflation gauge policymakers watch the most, increased just 0.3% in February and was up 4.6% on an annual basis. The monthly gain was less than expected.Earlier Wednesday, the consumer price index showed a rise of just 0.1% in March and decelerated to a 5% annual pace, the latter figure down a full percentage point from February.However, that headline CPI reading was held back mostly by tame food and energy prices, and a boost in shelter costs drove core inflation higher by 0.4% for the month and 5.6% from a year ago, slightly above where it was in February. The Fed expects housing inflation to slow through the year.There was some bad news on the inflation front: A monthly survey from the New York Fed showed that inflation expectations over the next year increased half a percentage point to 4.75% in March.
Markets as of Wednesday afternoon were assigning about a 72% chance of one more quarter percentage point rate hike in May before a policy pivot where the Fed cuts before the end of the year, according to CME Group data.Though the FOMC approved an increase in March, it did alter language in the post-meeting statement. Where previous statements referred to the need for “ongoing increases,” the committee changed the phrasing to indicate that more hikes “may be appropriate.” More

America’s banking conflagration may have died down, but the clean-up continues. Small and midsized banks have lost about $260bn in deposits this year. The Federal Reserve continues to plug much of the gap, having lent nearly $150bn to banks via its emergency schemes. Next year the Fed must decide whether to prolong them. By May 1st the Federal Deposit Insurance Corporation (fdic) will produce a menu of options for Congress about how to reform or expand the backstop the regulator provides, which is currently capped at $250,000 per depositor. Many blame the limit for the run which brought down Silicon Valley Bank (svb).As happens after every banking panic, the safety-net is being remade. And so regulators must again confront a profound question: how far into finance should the hand of government reach? Banks are inherently unstable. They offer deposits that are instantaneously redeemable while holding long-dated, illiquid assets such as mortgages and business loans. The mismatch means even well-managed institutions are vulnerable to a run that might be sparked by a misunderstanding. The fragility of banks is matched by severe consequences if they fail: runs tend to be contagious events that can cause credit crunches and recessions. [embedded content]Despite the danger banks pose, governments tolerate their existence. The transformation of liquidity and maturity is thought to enable a greater provision of credit and faster economic growth than would be possible under the alternative: a system of “narrow banks” in which deposits are fully backed by only the safest assets.Government props make the system more stable. But every leg of support requires fiddling to stop bankers exploiting the taxpayer. Take deposit insurance, which was established in America under the Glass-Steagall Act after the Depression. Although President Franklin Roosevelt signed it into law and is often credited as its inventor, he in fact tried to have it stripped from the bill, warning it would “lead to laxity in bank management and carelessness on the part of both banker and depositor”. Roosevelt may have lost the argument; it is nevertheless true that the more generous the deposit insurance, the less vigilant the depositor and the more it falls to regulators to ensure banks are not taking excessive risks.Another leg of support comes from central banks, which are meant to stop self-fulfilling panics by acting as a lender of last resort. In a crisis, central bankers follow a dictum attributed to Walter Bagehot, a former editor of The Economist, to lend freely, secured by good collateral and at a penalty rate of interest. This means deciding what good collateral is, and how much of a “haircut” (discount) to impose when valuing it. Precisely which assets the Fed or other central banks agree to lend against in a crisis will affect what assets banks choose to hold in normal times.Central bankers have long been aware of the perils of offering too much support. In 2009 Sir Paul Tucker, then of the Bank of England, warned about central banks becoming the “lender of second resort”, freeing banks from having to worry about the liquidity of their assets, so long as these were deemed eligible collateral. Yet central banks are getting more generous. The Fed’s latest facilities barely seem Bagehotian at all, valuing long-term securities at par even when the market has heavily discounted them, and imposing an interest penalty of a mere tenth of a percentage point.The logical accompaniment to the expansion of the banking safety-net would be rules to ensure that the wider net is not exploited. After the global financial crisis of 2007-09 regulators deemed long-term government bonds to be safe and liquid assets, which they assumed would be a source of liquidity for bankers to tap when the next crisis arrived before they turned to the central bank. Now the risks of long-dated assets have been made abundantly clear by rising interest rates, and the Fed and the fdic carried the can after all. Regulators could respond by redefining the highest-quality liquid assets as bonds that are both short-dated and issued by the most creditworthy sovereign borrowers. To do so, however, would be to take a step towards narrow banking, in which every deposit is backed by such an asset.This trade-off—between the safety of the banking system and the power of regulators—used to be murky. Some central banks were deliberately ambiguous about what collateral they would accept in an attempt to keep banks on their toes. But new technology seems to be forcing the government’s role into the open. Many blame mobile-banking apps and social media for the speed of the run on SVB. If runs are now more likely, so are emergency central-bank loans, making collateral policy still more important.At the end of Lombard StreetAnother looming change is the issuance of central-bank digital currencies (CBDC), which could give the public another alternative to holding bank deposits. In recent years economists have worried about the risk of CBDCs becoming de-facto narrow banks that drain the legacy system. But some argue that banks would work fine if the public switched their deposits for CBDCs, so long as the central bank stepped in to replace the lost funding. “The issuance of CBDC would simply render the central bank’s implicit lender-of-last-resort guarantee explicit,” wrote Markus Brunnermeier and Dirk Niepelt in 2019. This scenario seems to have partly materialised since SVB’s failure, as deposits have fled small banks for money-market funds which can park cash at the Fed, while the Fed makes loans to banks.The prospect of banks becoming de-facto government-funded should alarm anyone who values the role of the private sector in judging risk. Yet the difference between deposit financing underwritten by multiple layers of the state and funding that is provided directly by the state itself is getting harder to distinguish. A more explicit role for governments in the banking system may be the logical endpoint of the road down which regulators have been travelling for quite some time. ■ More

Most Americans surveyed have little confidence that Chinese President Xi Jinping will “do the right thing regarding world affairs,” a Pew Research Center poll found.
The study found 13% of Americans said they never heard of Xi — which surged to 27% among respondents ages 18 to 29.
Still, more than half of people in the U.S. said the two countries can work together on trade and economic policy, and student exchanges, the survey found.

U.S. President Joe Biden meets Chinese President Xi Jinping on the sidelines of the G-20 leaders’ summit in Bali, Indonesia, on Nov. 14, 2022.
Kevin Lamarque | Reuters

Most U.S. adults in a survey say they have little confidence that Chinese President Xi Jinping will “do the right thing regarding world affairs,” according to the poll by the Pew Research Center released Wednesday.
Despite that pessimism, more than half of people in the U.S. said the two countries can work together on trade and economic policy, the survey found.

The study, covering more than 3,500 U.S. adults between March 20 and 26, comes as U.S.-China tensions escalate to the point of limited bilateral interaction. Exerting pressure on Beijing is one of the few topics with strong bipartisan support in the U.S.
Meanwhile, Xi has consolidated his power in China and is seeking to to bolster China’s global influence.
In March, China brokered the restoration of diplomatic ties between Middle East rivals Saudi Arabia and Iran. Beijing has so far refused to condemn Russia’s unprovoked invasion of Ukraine, while calling for peace talks.
It is unclear how aware Pew survey respondents were of such world events and developments.
The study found 13% of Americans who participated in the survey said they have never heard of Xi — a percentage that surged to 27% among respondents ages 18 to 29.

However, most of the respondents took a pessimistic view: Nearly half, or 47%, said they had “no confidence at all” in Xi handling world affairs well, while another 30% said they had “not too much confidence.”
About three-fourths of respondents said that China does not take the interests of countries such as the U.S. into account, and that China interferes in the affairs of other countries, the report said.
More than half of the respondents said China does not contribute to global peace and stability.
That directly counters Beijing’s narrative that it’s a contributor to world peace and economic development.
China has accounted for well over 15% of global GDP in the last several years, according to World Bank data. In 2010, China surpassed Japan to become the world’s second-largest economy, behind only the U.S.
China’s Ministry of Foreign Affairs this year published papers that highlight U.S. involvement in “many wars overseas” and claim U.S. alliances in the Asia-Pacific are meant to “undermine peace.”

Economic cooperation

U.S.-China cooperation on economic matters was one of two areas in which Pew survey respondents remained more optimistic.
Just over half said the two countries could cooperate on trade and economic policy, the report said, without detailing questions about specific policies.
The only other category for which more than half the respondents said both countries could cooperate was student exchange programs, Pew found.
The number of Chinese students in the U.S. and American students studying in China dropped sharply during the Covid pandemic. It was a reflection of an overall withering of bilateral travel that has yet to recover significantly, according to a report last week published by the Center for Strategic and International Studies, a bipartisan policy research organization and Washington, D.C.-based think tank.
The report was co-authored by Scott Kennedy, CSIS Trustee Chair in Chinese Business and Economics, and Wang Jisi, founding president of Peking University’s Institute of International Strategic Studies.

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In visits to China in the last 12 months, Kennedy said people he met told him Washington was fully responsible for the decline in the U.S.-China relationship, and that China was still on the inevitable path of becoming a major power.
China is generally expected to overtake the U.S. as the world’s largest economy in the coming years.
One deep-seated narrative in China, frequently mentioned by Xi, is that the ruling Chinese Communist Party is leading the country “on the right side of history” and out of 19th century “humiliation” by Western imperialists.

General pessimism

Pew survey respondents mostly did not see areas of potential cooperation between the U.S. and China.
Out of five such areas listed in the survey, three saw more than half of respondents expressing pessimism: resolving international conflicts, climate change policy, and dealing with the spread of infectious diseases.
“I don’t know what we could possibly work with them on. Certainly not the climate,” the Pew report said, citing a 25-year-old unnamed woman who participated in a focus group.
The Biden administration has said the U.S. is in competition with China, and imposed export bans on critical semiconductor technology to China. It followed the Trump administration’s tariffs on Chinese goods and blacklisting of Chinese telecommunications giant Huawei.

The latest Pew survey found that nearly half the people surveyed in the U.S. said China gets more from the bilateral trade relationship, and more than 80% said China’s growing technological power is a serious — if not very serious — problem for the U.S.
Xi and President Joe Biden met in person in November for the first time since Biden took office. But according to public records, the two leaders have not spoken since the U.S. shot down an alleged Chinese spy balloon in American airspace in February.
The balloon incident caused U.S. Secretary of State Antony Blinken to postpone his trip to Beijing. Sources told CNBC last week that senior officials from the Department of Commerce would visit China as part of an effort to lay the groundwork for a potential trip by Secretary Gina Raimondo later this year.
— CNBC’s Kayla Tausche contributed to this report.

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Egg prices fell by 11% in March, after a 7% drop in February, according to the March 2023 inflation report issued Wednesday by the U.S. Bureau of Labor Statistics.
Wholesale prices have crashed in recent weeks, meaning consumers may get additional relief.
Egg supply is recovering from a historic and deadly outbreak of bird flu in 2022.
Consumer demand has also been relatively weak. Some families decorated Easter potatoes instead of Easter eggs this year, for example.

Miniseries | E+ | Getty Images

Egg prices fell by almost 11% in March, the U.S. Bureau of Labor Statistics said Wednesday, following a 7% decline in February and delivering relief from record-high prices over the winter.
The decrease is largely due to a recovery in egg production and weaker consumer demand, said Brian Moscogiuri, global trade strategist at Eggs Unlimited, an egg supplier.

Egg prices rose more than those of almost any other consumer good or service last year, in percentage terms. In a sign of the times, comedian Trevor Noah asked popstar Taylor Swift at the Grammy Awards in February if her fans could help reduce the high price of eggs.
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Consumers paid $4.21 for a dozen Grade A, large eggs in February, on average, according to most recent federal data. That’s more than double the price in February 2022, when a dozen eggs cost $2, but is down 61 cents from $4.82 in January 2023, which was a record high.

Why egg prices increased through 2022

The U.S. suffered its deadliest outbreak of bird flu in history in 2022. The disease — which is highly contagious and lethal among birds — killed tens of millions of egg-laying hens.
There hasn’t been a confirmed case at commercial egg farms since December, and supply has rebounded, Moscogiuri said.

Consumer demand has also been relatively weak, he added. Egg prices typically rise leading up to Easter, generally the second-strongest demand season behind the winter holidays; this year, the religious holiday fell on April 9.
But Easter 2023 was somewhat of a “dud,” Moscogiuri said. To reduce costs, decorating Easter potatoes caught on as an alternative to dying Easter eggs. Dollar Tree, a low-cost retail chain, pulled eggs from its store shelves in March until later this year due to high prices.

Wholesale egg prices have ‘crashed’

A hen belonging to Casim Abbas, a mathematics professor at Michigan State University, prepares to lay eggs in the chicken coop at Abbas’ small egg farm at his home in Williamston, Michigan, on Feb. 8, 2023. Due to the rise in prices, some people in the U.S. are turning to local farms and backyard operations to purchase their eggs.
Matthew Hatcher | Afp | Getty Images

Consumers may see prices fall further at grocery stores. Wholesale egg prices have “crashed” in recent weeks, Moscogiuri said.
“We’re seeing some of the cheapest egg prices in the last 52 weeks now,” he said.
Retail price trends generally track the wholesale market but lag by four to eight weeks, said Angel Rubio, senior analyst at Urner Barry, a market research firm that specializes in the wholesale food industry.

The food inflation fever has been broken.

Mark Zandi
chief economist of Moody’s Analytics

Egg prices declined amid a broad pullback in grocery prices last month. The food at home price index declined by 0.3% in March, the first decrease since September 2020, according to the BLS.
Lower diesel prices — an important component in transporting food to stores — and easing snags in food supply chains have helped contribute to lower overall grocery prices, said Mark Zandi, chief economist of Moody’s Analytics.
“It signals the food inflation fever has been broken,” Zandi said of the CPI data issued Wednesday.

Egg prices had also been nudged upward by rising costs for key animal-feed inputs like corn and soybeans, economists said. Those prices have declined from near-record highs hit in 2022.  
Egg prices could yet be pressured by future outbreaks of bird flu. The next few months represent peak migratory season for wild birds; despite ample investment by farmers in preventative disease measures over the past year, there are still concerns, Moscogiuri said. More