Impending Fed Rate Cuts To Offer Only Moderate Relief
Labor Deflation Likely To Remain Economy's De Facto Source Of (Re) Leverage
July 13th, 2024 - Volume 10 (2024), Missive 156 (Saturday)
Banks Urge Fed To Not Believe The Hype
Curve’s Are Split On How Useful The Fed’s Will Be
In The End, Its Labor That Will Pick Up Most Of The Tab
It was an interesting juxtaposition this week as the consumer and wholesale price indexes presented slightly different outlooks while a mixture of bank earnings provided solid results in the present but struck cautious tones for the future. The synopsis basically was the aggregate price level is getting weaker but the sustainability of that softness is still very much in question, at least by the heads of the some of the bigger commercial banks in the economy. And while the jury is basically always out when it comes to economic transitions in general, it would appear that bankers probably are not the most impartial judges when it comes to current dynamics that may sway monetary policy. For despite all the rancor and hawing coming out of the credit intermediation industry, the simple fact of the matter is that revenues have never grown easier lately than they have these past two years during which the Fed has aggressively move rates higher. Granted, the sector was besieged by tighter policy and increased regulatory and supervisory pressures from 2010 through 2019 so some relief was certainly welcomed. However, the 40 percent jump in total industry revenue over basically 6 quarters is not only unsustainable, but calls into question the concept of moral hazard; that is are banks too dependent on the Fed to drive their business rather than the actual business of banking itself? While that will be debated, it is clear that bankers will be lobbying the Fed to keep policy at current levels (if not higher) for as long as they can.
Monetary policy is the banks’ greatest revenue generator right now.
It is clear that it is anything but business as usual when it comes to banking these days as the total amount of intra-bank loans remains at 1970’s levels.
It goes without saying that what happens at the Fed first happens to the banking industry and then on through to the economy. In fact, to be part of the system, banks have to hold a charter with the Federal Reserve. This is because one of the most efficient ways the economy can pull forward its potential is through the medium of financial leverage. This means just by the nature of its business, banks deal exclusively in the commodity of economic potential. By far and away the most valuable commodity, economic potential can not be created or destroyed, rather used or wasted and it is these latter two that is the reason the a central bank exists in the first place. Dating all the way back to the 17th century when the British designed the Bank of England after a humiliating defeat at the hands of the French navy in the Battle of Beachy Head1,
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