Does The Fed Have The Stomach For A Deep Recession?
I would argue “No”, the Fed does not. Back in March 2023 when the regional banks were getting hammered the Fed and the FDIC back-stopped the banks with the Bank Term Funding Program that we write about each week. Had the Fed allowed banks who foolishly forgot to manage duration risk to fail, we would have seen the banks tighten further and the economy slow without a massive run-up in bond yields.
Yet, it would seem these days that every business, every commercial endeavor is “too big to fail”. The minute something in the economy cracks, the Fed is there ready to save the day (I say this with sarcasm). Had the Fed allowed the banking system to run its course, the U.S. economy would be on the path to healing as we speak. Instead, the U.S. economy is stuck in purgatory with the 10-year Treasury bumping against a 5% yield.
Lesson of the day? Allow the market to evolve naturally. There is no need for Central Bank intervention. Ever. Ditto for fiscal intervention.