The central banker’s dilemma

Today’s graph is about a fundamental change in the bond market that occurred over the last 10 days: it summarizes the expectations for further 25 bps interest rate increases by the Fed. The trouble in the banking sector, that started with SVB but now englobed banks globally like systemically relevant Credit Suisse, has fundamentally changed expectations for future monetary policy. Make no mistake: inflation is still above central bank’s target and does warrant further interest rate increases. These however are exposing the weakest banks and are leading to a loss of confidence that could ultimately lead to modern bank runs. In this dilemma, namely fighting inflation or saving the weakest banks, only history will tell us what was the right choice. Yesterday the ECB made a bold move by raising rates by 50 bps at a moment where confidence in the banking sector is low despite the liquidity lifelines thrown in. The banks we own in our portfolios have specific investment cases and do not appear at risk to us. On the contrary, we used the current market weakness to increase our exposure.