On Wednesday, the Federal Reserve increased their interest rate by 0.25% and the Chair Jerome Powell did a nice job in his press conference of trying to settle the nerves of financial markets. Unfortunately, the U.S. Treasury Secretary Janet Yellen did upset financial markets with her remarks about the banks. I plan to have far more to say about this in our quarterly newsletter that we will have sent to you in a couple weeks, but I would like to express one thought for now, “words matter.”
If we look back two weeks ago, two statements ignited the run of Silicon Valley Bank. First it was Fed Chair Jerome Powell telling Congress to expect interest rates to be pushed higher than he had earlier indicated and the CEO of Silicon Valley Bank telling listeners on a call that now was not a time to panic. Depositors had to ask themselves, what are we not supposed to panic about? A week ago, UBS had to be persuaded by the Swiss Government to purchase Credit Suisse to stop the run at the bank. This came as Credit Suisse had to admit that there was “material weakness” in its bookkeeping. At the same time, the chairman of Credit Suisse’s largest shareholder, Saudi National Bank, emphatically denied any help for Credit Suisse. Within a few days, Credit Suisse was done. Finally, the words of Janet Yellen last Wednesday turned an almost 1% up day in the stock market into a more than 1% loss with her words with bank stocks taking the brunt of the move.
The last few weeks have been volatile mostly because of the words of financial leaders. Just as they have caused negative reactions, they can also provide confidence. Our financial system is based on confidence. You go to a store and pay with a piece of plastic (credit card). The store owner believes that your plastic will provide them with payment for what they are selling. The Federal Reserve, the U.S. Treasury and the banks themselves are able to provide the words and actions to settle this situation. We are not in a doom loop like the financial crisis, but I, like you, would prefer that they get to the point of not causing self-inflicted wounds sooner rather than later.