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Have the Banks Brushed Their Teeth This Morning?

My kids made me play a game with them I called, “DA.” As in District Attorney. When they were younger, I would ask, “Did you brush your teeth?” “Yes.” After noticing the yellow fuzz, I grew skeptical – both of their teeth brushing and of my parenting skills.  

I eventually figured out they had brushed their teeth…at some point in their lives. They said it was my fault for not being more specific. I changed the parameters so that if I had to play DA, the punishment was coming even if they had done the task. I ain’t got time for that! You know what I’m asking!  

I flashed back to this when the Fed announced the end of the Bank Term Funding Program last week. At first, it read like a good ending. Great! The banking system really is safe. But the more I dug in, the more I realized they were silent on the whole repaying $160B in outstanding loans thing. It turns out the banks have up to a year to repay the loans from the time they borrow. $100B of that is still coming due in March, but that also means banks can borrow more today if they want to and that debt won’t be due for a year. Couldn’t a struggling bank that borrowed a year ago simply borrow more before March 11th and press the reset button on the one year maturity?! 

The Fed is making me play DA - I hate playing DA! You know what I’m asking! 

Then they added a twist I was unprepared for. I’m sure it’s a total coincidence, but the Fed is also going to start making banks borrow from the Discount Window once a year. “US regulators are preparing to introduce a plan to require that banks tap the Federal Reserve’s discount window at least once a year to reduce the stigma and ensure lenders are ready for troubled times.”  

To reduce the stigma… 

Banks are reluctant to borrow from the Discount Window because it sends a signal of weakness to the market. That was the whole reason the Fed created the Bank Term Funding Program when SVB collapsed. They didn’t want the market knowing who was borrowing money at the Discount Window. You may remember during the Financial Crisis, Wells was forced to take $25B even though it didn’t need the money…all so the banks that actually needed the money couldn’t be identified by the market. 

And now they are enacting a plan to force all banks to borrow just so the weak ones can’t be identified by the market…and that plan is being put into place at the exact same moment over $100B is due to be repaid. 

“Your Honor, I’d like to call The Fed to the stand,” I say. 

(Fed sits down in the witness stand and raises its right hand) 

“Do you swear to tell the truth, the whole truth, and nothing but the truth, so help you God?” 


“Yes or no…have the banks brushed their teeth this morning?”


Last Week This Morning

  • 10 Year Treasury at 4.14%
    • German bund at 2.30%
  • 2 Year Treasury at 4.36%
  • SOFR at 5.32%
  • Term SOFR at 5.34%
  • Bank of Japan held negative rates but indicated they may soon hike
  • Bank of Canada held rates steady
  • ECB held rates steady
    • Lagarde: Premature to discuss rate cuts but also suggested she expects cuts this summer
  • Durable Goods Orders MoM 0.0% vs. 1.1% expected
  • GDP Q4 3.3% vs. 2.0% expected
  • GDP Price Index 1.5% vs. 2.3% expected
  • Core PCE came in mostly as expected



In June, the Fed was projecting Core PCE would finish the year at 3.9%. On Friday, Core PCE came in at 2.9% - the lowest in almost three years.

We were at 4.9% at this time last year. That’s a 2% drop in twelve months with only 0.9% to go until we hit the target.

If you look at the monthly data, we’ve already arrived at 2.0%. Monthly Core PCE:

  • 3 month average, annualized: 1.5%
  • 6 month average, annualized: 1.8%

Inflation’s already at 2%, we’re just waiting for the stale government stats to catch up.

Remember – higher for longer means real rates, not nominal rates. With inflation falling, real rates keep climbing even without the Fed hiking. They can cut rates and maintain the exact same amount of braking action.

In fact, failing to cut risks slamming on the brakes.


Fed Meeting This Week – Lower but Slower

The Fed is obviously leaving rates unchanged this week, but the real question is the messaging for the months ahead. The GDP data gives them enough cover fire to stick with the whole “it’s premature to be discussing cuts” thing.

I still think it makes June the most likely first cut, but it wouldn’t be a surprise to see a cut in March.

Even though March is a coin toss in futures markets, the odds of only one cut through the June meeting are just 14%. By the March meeting, the Fed will have gotten another Core PCE report and two more jobs reports. I think those largely dictate the outcome of that meeting.

One thing I feel really confident about is some sort of autopilot element to this year’s rate cuts. Start too early, some people fear inflation could reaccelerate. Wait too long, run the risk of appearing to influence the election. If 2023’s mantra of “higher for longer” is seen as a success behind closed Fed doors, perhaps this year’s mantra will be “Lower but Slower”.

Given the 2.9% inflation print, I don’t see the need for Powell to backpedal on December’s dovish language, but I also don’t see any reason to start signaling the cuts. This will be a largely neutral meeting.


The Week Ahead

Huge week with the Fed meeting and the jobs report. Thankfully I get to spend it in sunny San Diego with 10,000 of my closest friends instead of examining the banks’ teeth for fuzz.