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March
22
2023

Powell's Problem: KISS Vs 'Too Clever By Half'
Peter Tchir

KISS (Keep It Simple Stupid) seems perfectly American, while Too Clever by Half is quintessential British!

I think Powell needs to deliver one simple message:

• There is zero chance that you will regret keeping your deposits at your existing bank.

I don’t really care how he does it, but that is the message that I’m looking for. He needs to reassure (or assure) everyone that the triumvirate of the Fed, FDIC and the Treasury have the tools, the power and the willingness to do this. Maybe he talks about various lending programs, or hints that implicit deposit guarantees are pretty much explicit once the FDIC gets control (as opposed to needing Congressional approval).  Maybe he comes up with things I haven’t thought of. But for me, the most important aspect of today’s press conference will be how good of a job convincing the American public (not just the wonks on Wall Street) that they can (and even should) keep their deposits where they are.

The fact that there is minimal cost to moving deposits from one bank to the next is what nags at me, and why I think it is so important for Powell to focus on this.

Don’t Overthink It

My base case is that Powell will do the following:

• Raise 25 bps to show he’s tough on inflation.

  • Inflation was dropping steadily for 6 months, picked up, but some of the latest data showed that was already slowing (the ADP, NFP and JOLTS all pointed to wage pressure alleviating). So why are we being tough on something where the fears may well be overblown other than we are fighting the last mistake, is beyond me. It was just in January that disinflation was the word of the day.

  • We have no idea what the impact to the economy, spending and inflation will be from two failed banks and this shift from deposits across the board to money market funds, but also to the shift in deposits from smaller institutions to the “too big to fail” banks.

  • I disagree with hiking 25 bps and focusing on inflation, but it is not a game killer for risk.

• Data Dependent, follow the ECB’s lead on no forward guidance.

  • Whether he hikes 25 or pauses, this is what the market is really looking to hear on the rate front and should be positive for risk.

• Outline how and why banks are safe for depositors.

  • I really think little else matters. How well he delivers on this will determine where stocks are by the end of the week.

If he gets caught up talking about mandates and addressing the Fed wonks on Wall Street, I think this ends badly for risk. If he looks America, mainstream media and even Twitter straight in the eye and delivers a clear and strong message on banks, then off to the races on risk!

Without a doubt 0DTE options will play a role in creating noise during the press conference, but also amplifying whatever direction the market decides to take when it is all said and done.

Basically, choose KISS over being Too Clever by Half!

Academy’s Macro Strategy department is led by Peter Tchir and is designed to help companies and investors navigate markets and the economy by creating content that analyzes developments in a provocative way.

Our coverage focuses on fixed income and credit markets and harnesses Peter’s experience as a trader and portfolio manager.  Academy’s Macro Strategy content challenges existing consensus views and incorporates ESG and Geopolitical analysis in a way that helps clarify how world events affect the unique individual objectives of our clients and partners.

Peter Tchir has been advising asset managers and corporations since 2009. He has traded and structured a wide variety of fixed income products, including synthetic CDO’s, high yield bonds, aircraft leases, indices, and fixed income ETFs. That experience helps provide unique insights into the markets via the “T-Report” and frequent appearances on various financial markets networks.

 

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