On U.S. Inflation, Mortgage Rates and a Bank's Collapse

Last week, U.S. Federal Reserve Chairman Jerome Powell, testifying to the U.S. Congress, said: 

  • “Inflation is extremely high ... it is hurting the working people of this nation badly ... we are taking the only measures that we have to bring inflation down.

  • “Activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.

  • “The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy."

Separately, Freddie Mac Chief Economist Sam Khater said,

  • “Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,

  • "Consumers are spending in sectors that are not interest rate sensitive, such as travel and dining out. However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory.”

  • Note: Freddie Mac is a US sponsored enterprise with about $3 trillion of assets under management.

The U.S. 30-year mortgage rates rose to 6.73% last week. The following chart presents U.S. mortgage rates for the past 20 years.

Chart 1: U.S. Mortgage Rates - past 20 years (03/12/03 - 03/09/23)

Source: Freddie Mac

 

Finally, the closing of Silicon Valley Bank, by the California Department of Financial Protection, resulted from rising interest rates, customer withdrawals and a declining stock price. The Federal Deposit Insurance Corporation, as receiver, said: 

  • “As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assetsand about $175.4 billion in total deposits.

  • “At the time of closing, the amount of deposits in excess of the insurance limits [of $250,000] was undetermined."

Notes: Silicon Valley Bank was lender to leading technology-related firms. It is the largest U.S. bank to fail since the 2008 financial crisis.

The following chart is Silicon Valley Bank's stock price for the past 12 months. Its high, on March 29, 2022, was $592. When trading halted on Thursday, the price was $106 per share. 

Chart 2: Silicon Valley Bank (SIVB) Stock Price: past 12 months

OUR TAKE

  • The Federal Reserve will continue to increase its key rate into at least mid 2023, but it is less clear when rates will decline from current levels.

  • Increasing interest rates has the potential to increase unemployment as well - which is a concern of many policy makers.

  • A factor in the closing of Silicon Valley Bank was the impact of rising interest rates on its portfolio. As depositors, staff, services providers, investors and other assess its collapse, concerns about 1) ripple effects and 2) other financial system risks have increased.

Paul Dravis