George Gammon: The Fed Just Broke Everything

Over the past year, the Federal Reserve has aggressively raised interest rates at its fastest pace in 40 years. The goal? To stop inflation in its tracks as it approached double-digit levels.

So far, inflation has started to come down. However, the speed at which the Fed has raised interest rates has caused significant issues. That includes a stock market decline, the collapse of crypto lending, and now problems with the banking sector.

Worse, as the Fed has raised interest rates, the yields on U.S. Treasuries have become inverted. Short-term yields are higher than long-term yields. That’s usually the opposite of a normal yield curve. This is usually a sign of a recession.

It can also mean that banks and other institutions that own sizeable positions in long bonds may face liquidity issues. That was the issue that broke Silicon Valley Bank. The bank was technically solvent, but only if they held their 30-year U.S. Treasuries to maturity.

Banks generally borrow short and lend long. This requires shorter-term rates to be lower than longer-term rates. An inverted yield curve makes the space unprofitable. And it’s likely that Silicon Valley Bank wasn’t alone in poor risk management on its Treasury yields.

That suggests that we’re not out of the woods yet. The chances of a recession have jumped with the latest banking concerns. That suggests that the economy and stock market are likely to get worse in the months ahead.

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