Vise Tightens At The Fed

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In comments on the market, Daniel Berkowitz, investment director for investment manager Prudent Management Associates wrote:

In a pleasant turn of events, the equity markets as of this writing today are broadly up in light of a somewhat positive inflation report and a rebound in the shares of some hard-hit regional banks. With that said, though market volatility isn’t surging at the moment, we do expect it to pick up over the coming weeks.

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The Fed Is Caught Between A Rock And A Hard Place

The Fed is now more than ever caught between its desire to combat inflation and its responsibility not to further inflame the wreckage caused by the collapse of SVB Financial Group (NASDAQ:SIVB). Cooling in the headline CPI report was welcome news, though a closer look under the hood suggests that inflation isn’t going away quietly.

Core inflation actually accelerated on a month-over-month basis, leading to a 3-month annualized rate of 5.2%. Additionally, one of Chairman Powell’s preferred inflation metrics, core services inflation excluding shelter, also accelerated slightly in February on a month-over-month basis.

This metric is of particular importance because the Fed believes it shows a cleaner look at how tightness in the labor market is filtering into CPI data.

With government officials successfully lowering the temperature in the markets related to SVB’s collapse (for now), a 25-basis-point increase at the next FOMC meeting seems very possible.

Markets agree, with data from CME FedWatch suggesting roughly a 70% probability of a small hike next week. A strategic pause is also reasonable, though pausing may signal to the markets that the Fed isn’t fully confident in the stability of the banking sector, which could induce further volatility in and of itself.


Regarding SVB, while we are reluctant to suggest “it’s different this time,” we can suggest it’s not quite the same. Executives of SVB didn’t invest the bank’s assets in high-risk investments which is a far cry from the excessive risk-taking related to complex mortgage-backed securities that ultimately triggered the 2008-2009 crisis.

Looking ahead, it’s likely that additional regulation is on the docket, as it seems clear that in an age of mobile banking and light-speed information flow via social media, even smaller regional banks can be systemically important.

Taking a broader perspective, while events over the past 10 days are provocative and can motivate investors to “do something” now, more than ever perhaps, this advice applies: making fundamental changes to investment strategies during a time of crisis is often a mistake. We strongly believe that, for investors who enter times of crisis with a good investment plan, the best course of action is often to stay the course.

About Prudent Management Associates

Prudent’s core investment philosophy focuses on minimizing risk over time. As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.