Michael Howell: Can The Fed Keep Raising Rates During A Banking Crisis? | Michael Howell

Episode Summary

Executive Summary: The episode centers on Michael Howell’s interpretation of Powell’s post-FOMC press conference as a signal that rates are near peak, while bank stress has exposed a broader liquidity/funding crisis. Howell argues the Fed and other central banks are effectively backstopping banks, merging bank and central-bank balance sheets, and likely pushing the system toward yield-curve control, more liquidity, and higher structural inflation.

Main Topics: Powell’s FOMC as a signal that rates are near the peak (Priority: 5/5): Howell says Powell was unusually transparent and that the meeting revealed the Fed is closer to the terminal rate than markets expected, though rates may stay elevated for longer. Banking stress as a liquidity/funding crisis, not just solvency (Priority: 5/5): He argues bank failures are primarily about funding and liquidity pressure created by rising rates, duration losses, and fragile bank balance sheets, rather than traditional borrower stress. De facto nationalization and bank backstops (Priority: 5/5): Howell believes the SVB response effectively guaranteed deposits and merged central-bank support with commercial bank liabilities, amounting to a de facto nationalization of the banking system. Quantitative easing through liquidity facilities (Priority: 4/5): He frames the discount window and BTFP as balance-sheet expansion that eases financial conditions, even if the Fed insists it is not changing monetary policy. Yield-curve control and fiscal dominance (Priority: 5/5): Howell says inverted yields are unsustainable, the Fed will need an upward-sloping curve, and governments will rely on banks to absorb more sovereign debt, increasing fiscal dominance. Liquidity indicators and market implications (Priority: 4/5): He emphasizes monitoring the MOVE index, reverse repo, bank reserves, and the yield curve as better signals than the VIX, arguing these point to rising liquidity and eventual risk-asset support. Gold, Bitcoin, and cyclicals as beneficiaries of liquidity (Priority: 4/5): He expects monetary inflation hedges like gold and Bitcoin, plus cyclical equities, to benefit first as liquidity improves, with equities lagging but eventually following.

Key Arguments: The FOMC meeting signaled the Fed is nearer the peak in rates, and future policy will be constrained by banking-system fragility. Bank failures are evidence of a liquidity/funding crisis; the core issue is banks’ balance-sheet mismatch and duration losses, not just bad lending. The Fed’s emergency facilities are functionally easing monetary policy by increasing reserves and supporting collateral values. SVB-style deposit protection implies a de facto guarantee of bank deposits, which would need to be mirrored globally to avoid disadvantaging U.S. banks. The banking system and central banks are converging; this resembles a soft nationalization of bank liabilities and a step toward CBDC-like structures. Persistent government deficits and bank demand for sovereign debt will likely force yield-curve control to keep long rates from rising too far. Structural inflation should be higher because debt monetization, fiscal deficits, and bank balance-sheet expansion will feed money supply growth. The MOVE index and reverse repo facility are more important than equity volatility for understanding systemic liquidity conditions. Risk assets should be analyzed via liquidity sequencing: bonds and credit first, then cyclicals, then broader equities. Gold and Bitcoin are monetary-inflation hedges, so they should benefit if the liquidity cycle turns up.

Data Points: Fed policy rate after meeting: 4.75% to 5.00% - Powell’s March FOMC hike discussed as the current policy range. Bank term funding program eligible collateral (small banks): ~$1 trillion - Howell estimated smaller U.S. banks could post roughly this amount to the Fed. Bank term funding program eligible collateral (large banks): ~$4 trillion - Howell estimated larger banks could post roughly this amount in eligible securities. Potential Fed balance sheet increase: $4–5 trillion in extremis - Howell’s upper-end estimate if facilities are heavily used. Global debt: ~$350 trillion - Used to argue refinancing needs dominate capital markets. Annual debt rollover need: ~$70 trillion per year - Assuming average five-year maturity on global debt. Annual new capital raised: ~$10 trillion - Compared with refinancing volume to show the system is refinancing-driven. Refinancing-to-new financing ratio: 7:1 - Howell’s estimate of refinancing needs versus new issuance. U.S. debt-to-GDP: Near 100% - Used in his debt-growth and inflation arithmetic. Primary budget deficit assumption: 3% - Example used to show debt and money-supply growth dynamics. Implied debt growth: 8% - 3% primary deficit + 5% interest on debt in his illustrative calculation. Implied inflation example: 6% - If nominal debt growth is 8% and real growth is 2%, he infers 6% inflation. Federal Reserve reserves (pre-crisis operating level): ~$3 trillion - Howell said the Fed had been operating bank reserves around this level. Minimum operating reserve estimate: $2.5–2.7 trillion - Howell cited market/academic estimates for the reserve floor. Reserve shortfall after crisis: ~$3.5 trillion short - Howell said reserves are effectively below the level now needed post-crisis. Reverse repo facility balance: ~$2.2 trillion - Discussed as liquidity parked at the Fed rather than actively circulating. MOVE index peak: ~200 - Howell said bond-market volatility spiked to around this level during stress. MOVE index threshold: 150 - Historically cited level above which authorities may have lost control of the bond market. Bitcoin rally over a month: $20,000 to $28,000 - Used to illustrate recent liquidity-driven risk-asset strength. Bitcoin return: ~40% - Calculated from the move from $20k to $28k. PBOC liquidity injection: 3 trillion yuan - Howell said China injected this amount in December-January. PBOC liquidity injection in USD: < $0.5 trillion - Approximate dollar equivalent given in the discussion. PBOC comparison: 3.5x prior two years - He said the December-January injection was 3.5 times the prior two years’ total. ECB balance-sheet shrink target: 15%–20% - Howell said the ECB planned to shrink its balance sheet this year but doubted it would succeed. Bank of England policy rate: 4% - Referenced as the expected BoE level around the time of the discussion.

Pivotal Quotes: "we're moving towards a situation whereby the balance sheet of commercial banks, and the balance sheets of the central banks are de facto merging together" — Michael Howell: Howell’s core thesis on the post-SVB policy response and systemic backstop. "this is a funding crisis" — Michael Howell: He repeatedly framed banking stress as liquidity/funding stress rather than borrower stress. "What central banks have got to do... is to lend freely, lots of liquidity, in other words, against good collateral at a high interest rate" — Michael Howell: He invoked Walter Bagehot as the proper model for lender-of-last-resort policy.

Implications: Listeners should expect tighter bank oversight, more central-bank liquidity support, and a likely cap on how high long rates can rise. If Howell is right, liquidity-sensitive assets—gold, Bitcoin, cyclicals—may outperform as inflation stays structurally elevated.