🎶 Happy First Birthday, Dear Interest Rate Increases 🎶

On March 16, 2023, we marked the one-year anniversary of the Federal Reserve’s first of eight interest rate increases. According to Fed Chair Jerome Powell, the purpose was to bring the inflation rate down to 2% without sparking a recession.

Has the Fed been successful? Well, inflation has fallen from an annual rate of 8.5% to around 6%. Some analysts argue that the Fed’s impact has been limited because it should have started raising rates sooner. Others believe that the Fed could not have anticipated that its actions would have so little impact on the country’s employment rate.

Twelve months ago, inflation was in the Fed’s crosshairs, but today we’re seeing some results it failed to anticipate or, perhaps, appreciate. As interest rates increased, banks holding significant amounts of Treasury and municipal bonds, and mortgage-backed securities saw the value of their portfolios plummet. Why? Because prices of these “normally” secure / fixed income products fall when interest rates go up. (We’ve put “normally” in quotes because we’ve become accustomed to 1) falling interest rates over the past 30 years and 2) 0% rates for nearly two years.)

Two weeks ago, when depositors of Silicon Valley Bank and Signature Bank of New York withdrew their funds, these banks had to sell assets at a substantial loss. Following the seizure of these banks, shares of First Republic Bank plummeted, putting its existence at risk.

The big banks’ response

On March 14, the country’s largest banks injected $30 billion into First Republic Bank to provide liquidity after its shares fell dramatically and its credit rating was downgraded. Time will tell if this swift action reassures Americans and the world that the banking system is secure.

The U.S. Government response

The Federal Reserve set up a $2 trillion backstop (the Bank Term Funding Program or BTFP) to provide liquidity for the U.S. banking system via 12-month loans. It also assured banks that it would honor the par value of “U.S. Treasuries, agency debt and other qualifying assets” that banks use as collateral, rather than the low current value banks would receive if they were forced to sell collateral assets to cover withdrawals.

What happens next?

Smaller banks may be more likely to take advantage of the Fed’s BTFP, but they might also tighten up their lending requirements making it more difficult for individuals to get mortgages and businesses to get loans.

This Week’s Signal

On Wednesday of this week, the Fed decided which monster—inflation or concerns about the banking system—it would attempt to tame using interest rates.

When it decided to hike interest rates by 25 basis points, the Fed signaled that it believes the greater threat to the U.S. economy is inflation and will deal with the financial system using other tools. The European Central Bank used the same strategy even as Credit Suisse collapsed. When the U.S. Bureau of Labor Statistics releases new figures on April 12, we’ll see whether the Fed’s strategy is working.

As always, we’re monitoring changes in the markets, the banking system and across the economy. We will continue to manage your portfolio based on your goals and make adjustments as necessary. Please feel free to contact us at any time.

How We Help

The Lifestyle Protector Process Guides and Adapts with Life Changes

We have been working with a client who is employed at a Fortune 100 company for about ten years and was thinking of getting married. As we always do, we used our Lifestyle Protector Process™ to help her understand her current financial position, anticipate and prepare for potential obstacles, and set goals for her future. As her family grew and her career took off, we continued to monitor the financial plan.

As she moved up the ranks, her salary increased, and she was given the opportunity to participate in incentive compensation plans (involving stock options and restricted stock). We helped her understand the pros and cons of each program and pick the one that best aligned with her family’s current and future financial goals.

Today she is fully vested in her benefits and we’re helping her choose the best time to exercise her options. You’ve likely already guessed that the parameters for her “best time” were the goals she’d set and adjusted over the years using the Lifestyle Protector Process™.

Lifestyle

Your Home is Your Castle. And Today, It’s Your Office.

WFH is an acronym that wasn’t part of the vocabulary before the pandemic but working from home is the new normal for workers who have chosen to continue working from home or whose employers have decided that lower overhead due to decreased rent expenses and increased productivity are positive pandemic effects.

Two common improvements to home offices are chair and desk upgrades. Remote workers are buying ergonomically designed chairs or adapting the ones they have with gel seat cushions. Laptop stands, folding and standing desks are popular but so too are under-desk bikes and desks that are bikes.

To organize our stuff, we’re hiding supplies in hidden drawers or making everything from lights, to lap desks do double duty: lights as charging stations and lap desks with built-in mouse pads, wrist supports and phone-tablet holders.

With a little ingenuity and not much cash, workers too can make WFH a positive pandemic experience.

Advisory Services offered through Obsidian Personal Planning Solutions, LLC. Securities are offered through Triad Advisors, member ​FINRA/SIPC.​ Obsidian Personal Planning Solutions, LLC, and Obsidian Personal Planning Solutions, Inc, are not affiliated with Triad Advisors.

Quiz Answers:

1. According to the U.S. Census bureau, 31.5 million residents (9.7%)
2. 50
3. New York City
4. 23
5. 4000

Advisory Services offered through Obsidian Personal Planning Solutions, LLC. Securities are offered through Triad Advisors, member FINRA/SIPC. Obsidian Personal Planning Solutions, LLC, and Obsidian Personal Planning Solutions, Inc, are not affiliated with Triad Advisors.