September 24, 2023
On Thursday at 4 pm ET, Fed Chair Powell will make an important speech. The world will be watching.
For two months, the Fed has positioned the yield curve with long-term interest rates increasing faster than short-term rates. Obviously, it assumes the economy can withstand these rate increases without causing a recession, which is debatable.
When the Fed tightened financial conditions like this in 2000, 2007, and 2018, it led to severe equity price declines and economic distress. I am concerned it’s going to do so again in 2024, and possibly this quarter. Rapid increases in long-term borrowing costs, e.g., 30-year mortgage rates and corporate borrowing rates, are already negatively affecting banking, insurance, and real estate.
Without some quick relief in long-term rates, I suspect we will see another round of regional bank failures in the months ahead, as happened in March. Look at the chart of JP Morgan Chase (JPM in purple), America’s strongest bank, versus the regional banks (KRE in red).
As I noted in my Friday report on JPM, long-term-oriented investors will soon be able to buy JPM shares in the low 130s.