Callan Family Office Insights: The January 31st Federal Reserve Announcement

On January 31st, the Federal Reserve released their announcement from the January 30-31st meeting. Following the meeting the Fed Chair was interviewed by the media. Questions in the Q&A revolved around the timing of the next rate cut (with the implication that no further rate hikes are pending). Chairman Powell shared that the Fed was seeing data that was indicative of inflation moderating over the short term, while showing job gains continuing with unemployment still low.

That is what they said, but equally important was what they did not say.

Callan Family Office was surprised to see an omission from this statement compared with the release from the previous Fed meeting. Missing from this report was the sentence, “The U.S. Banking System is sound and resilient.” We can speculate the elimination of this sentence is related more to the fact that its original inclusion was needed to steady the markets after the high-profile failures of First Republic and Silicon Valley Bank in 2023. The rapid rise in interest rates during 2022 had caused several institutions to show mark-to-market losses on their balance sheets that thereby reduced excess capital margins. In response to this, the Fed began a special program to swap certain securities at book value, helping maintain appropriate capital levels for these banks. This capital stabilization program is set to expire in a few months.

However, you could also infer this another way. Given the expiration of the program, these banks will need to unwind the swap with the Fed. This will leave them with assets that have regained some value due to the reduction in rates since last spring. This doesn’t mean that their ability to lend has materially improved. As a matter of fact, many of the larger banks that have reported fourth-quarter earnings have increased their loan loss reserves, confirming continued stress within the banking environment.  We would expect that this will result in banks becoming more restrictive in their lending and consequently this leads us to reaffirm our belief that opportunities still exist in private credit to generate returns that are attractive to our clients.


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