Monday, March 13, 2023

Risk Management


A banking expert friend has informed me that the Federal Reserve Bank requires banks to manage risk in their bond portfolios to anticipate federal funds rates to be increased by 3 percentage points over a 3 year period.

Sounds reasonable.

So I went to Forbes to verify what our current Fed has beeen doing with interest rates … and found that rates have been pushed up by the Powell posse by 4 and 1/2 percentage points in less than one year!

Yes, the Fed was trying to paper over Biden’s fire-hose spending … and the resulting inflation … but it should have realized the likely consequences of the pace of its rate hikes.

Basically, the Fed told banks how to manage their bond portfolio risk … then grosssly exceeded their implied promise.

So, Pilgrim, our Fed’s incompetitence seems at the root of our current trauma … which clearly might get worse … as I suspect other banks followed its risk-management guidelines.

I hope not … but the evidence seems clear … that unless the Fed takes some drastic actions … like cutting rates by at least one point … we’re in a real pickle.

Afterward: Talked to my banker friend again and he said the his risk management parameter may not be universal and the most current number … but you get the idea.


No comments: