This Week in Review:
A Busy Week
Here’s what else we’ve been watching this week:
- Bank failures reverberate. The collapse of Silicon Valley Bank (SVB)—which Adviser CIO Tim Clift addressed earlier this week—plus the folding of Signature Bank and concerns about Credit Suisse in recent days sent shockwaves through Wall Street as fears mounted about possible contagion within the banking sector. Credit Suisse quickly secured a line of credit, allaying investor worries. Meanwhile, quick action by the U.S. government has prevented bank runs from spreading to other midsize regional banks for now. We are monitoring the situation and its potential impact on financial industry stocks.
- Upcoming Fed meeting. The Federal Reserve convenes next week amid questions about whether it fell short in its supervisory duties of SVB. Prior to the bank’s collapse, many analysts considered an interest-rate hike of 0.25% or 0.50% to be a near certainty. The bank failures could put the Fed’s policymakers on a more dovish path until containment of the fallout is assured—in the short term.
- Inflation ebbs. The Fed’s heretofore aggressive rate-hike approach has been aimed at taming inflation, and the latest numbers indicate the strategy may be working. The consumer price index (CPI) rose 6% in February from the same time last year—that’s the smallest increase since September 2021, but still well above the central bank’s 2% target. U.S. producer prices (a gauge of wholesale prices) also declined unexpectedly in February. More on inflation trends below.
The Truth About Inflation
It has been over a year since Federal Reserve Chair Jerome Powell retired the word “transitory” from his characterization of inflation. Since then, Powell and the Fed have acted aggressively to hike the policy interest rate in hopes of slowing demand and therefore tamping down rising costs for consumers.
On Tuesday, the Bureau of Labor Statistics released the February CPI report—a common measure of inflation that tracks the change in prices for certain goods and services.
As mentioned above, the headline year-over-year number was 6.0% in February, down from 6.4% in January and the high of 9.1% in June 2022.
So, on the surface, it looks like the Fed’s policy is working. But we wanted to peer past the headline number to get a better look at the underlying trend.
We found that inflation has decelerated more rapidly in the short term. Over the most recent six-month period, the annualized inflation rate was 4.3%. This is substantially lower than the headline 6.0% annual rate (due to the exclusion of the higher monthly changes to CPI in the early part of 2022).
By this gauge, inflation is closer to the Fed’s target of 2.0% than one might think by simply looking at the number in financial headlines—though there is still a way to go.
You can be sure the Fed is well aware of this trend. The question is how much more the central bank believes it needs to do to reach its target level for inflation.
We’ll know more next Wednesday, when the bank’s Federal Open Market Committee is due to make its latest policy statement. At present, based on action in the fed funds futures market, traders’ expectations are for a 25-basis-point hike, though a number of investors are betting the Fed will make no change.
We view either of those moves as confirmation that inflation is a less significant threat to economic growth than it was just a few months ago.
Are Your Bank Deposits Safe?
The recent scare in the consumer banking sector begs the question: How safe is your money really…even at a respected financial institution?
Let’s get something out of the way: A bank account that’s covered by the Federal Deposit Insurance Corporation (FDIC) is a safe place to put your money. In fact, exactly $0 of FDIC-insured deposits have been lost since its inception in 1933. The turmoil at Silicon Valley Bank (SVB) has been a reminder of the value (and limitations) of that insurance—more than 85% of the bank’s deposits were uninsured because (in many cases) they were above the maximum limit.
Which accounts qualify for protection? Customer deposits at FDIC-insured banks up to $250,000 per individual, per bank—or $250,000 each for the co-owners of a joint account—are insured. Checking accounts, savings accounts, revocable and irrevocable trusts, money market accounts (note that this is different than a money market fund) and certificates of deposit (CDs) all qualify for coverage. The FDIC also provides coverage for deposit accounts held within a traditional or Roth IRA at an FDIC-insured financial institution, although not all IRA accounts fall into this category.
The FDIC doesn’t cover annuities or investment products such as stocks, bonds and money market funds. It also doesn’t protect against fraud or identity theft. (Click here to see a table of what’s covered and the guidelines for each account type.)
Think of it like this: The FDIC functions like any other insurance policy in your financial plan. You hope you’ll never need it, but it becomes incredibly important in certain unlikely circumstances—like a bank run.
The Federal Reserve, FDIC and U.S. Treasury announced that they would cover all deposits at SVB and Signature Bank to prevent further economic damage. Can we assume they will do the same the next time a bank fails? While it’s possible, we would not recommend holding above the FDIC limit at any one insured bank. Every situation is different and there is no guarantee that the actions taken over the weekend will be repeated in the future.
Check here to make sure that your bank is FDIC insured and consider diversifying your cash holdings across multiple banks if they total more than $250,000 per account owner. Please don’t hesitate to ask your wealth adviser for assistance or advice—our firm has extensive experience managing through periods of crisis. Your team will be able to answer your questions about the FDIC and the safety of your cash accounts.
Recent Polaris News & Insights
Next week the Fed will be center stage, giving a policy statement and press conference on Wednesday following the close of its two-day meeting. We’ll also get useful reads on sales of new and previously owned homes.
Remember to visit polariswealth.com for our timely and ongoing wealth management commentary.
Please note: This update was prepared on Friday, March 17, 2023, prior to the market’s close.
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