Don't Be Shocked If The Fed Lowers Rates On January 31st
If the Fed truly plans to allow its BTFP to expire on March 11th, then it will have to lower rates meaningfully this year to support the banks, particularly Bank of America. I believe that if the Fed removes the BTFP facility and maintains elevated rates, Bank of America will need to be bailed out this year.
Bank of America’s enormous unrealized losses ($102 billion as of December 31st, 2023), will cause the bank to become extremely conservative in its lending practices in the absence of the BTFP and in the absence of low interest rates this year. Under this scenario, investors will smell blood and depositors will eventually panic at some point during 2024 and will begin to withdraw deposits. Bank of America will be forced to sell underwater assets to raise liquidity and the Banking industry will have a repeat of March 2023 on its hands. The only difference is that the names will change with BofA capturing all of the headlines instead of SVB.
The only two ways of avoiding such a crisis in my view will be for the Fed to renew the BTFP for another year, or, the Fed must significantly reduce interest rates in order to reinflate the bond market which will cause Bank of America’s unrealized losses to narrow further (BofA’s unrealized losses narrowed from $136 billion as of September 30th, 2023 to $102 billion at year-end as referenced earlier as yields have come in).
Therefore, if the above is the endgame, why should the Fed wait for its March 20th FOMC meeting to begin lowering interest rates? Why not begin on its January 31st FOMC meeting? The inflation battle is lost. Prices are up 40-100% since 2020 for most goods and services. So, let’s not put forth inflation fighting as an excuse for the Fed to maintain elevated interest rates.
It is time for the Fed to bail out the Banking sector again with low interest rates. It is also time for Bank of America CEO Brian Moynihan to retire or be forced to retire. Heck, if Bill Belichick can be forced out, Mr. Moynihan is well past his best by date.