Interest Rate Risk Isn’t Going Away

As temperatures warm up across most of the U.S., there are signs inflation might be cooling—just probably not fast enough to stave off another interest rate hike.

While Axios reported “guarded optimism” after the March inflation report, Fed Governing Board Member Chris Waller said inflation “is still much too high” and that his “job is not done,” according to the Associated Press.

Not surprisingly, CME’s FedWatch Tool puts the chances of another inflation-fighting interest rate hike at the May 3 Fed meeting at greater than 86%. It also predicts two rate drops before the end of the year, likely due to a recent “mild recession” forecast by the Fed.

But for now, interest rate relief is unlikely for what a recent American Banker article characterized as banks that are “deeply underwater” on long-term bonds.

The story says the industry’s unrealized losses on bond portfolios that lost value due to higher interest rates totaled around $620 billion at the end of 2022. While those losses are likely to remain unrealized, the IMF’s new Global Financial Stability Report shows that rapid rate increases to stem inflation historically bring more risk for financial institutions, leading to “stresses that expose fault lines in the financial system.”

Meanwhile, the country’s largest banks, according to strikingly positive earnings, find themselves on sure footing on one side of the fault line, benefiting from the same higher interest rates that contributed to the collapse of Silicon Valley Bank. But according to the Wall Street Journal, “the pressures coming from rising rates aren’t going away”—and even huge banks could feel the pinch if rates continue to climb or stay high for a prolonged period. “Higher for longer comes with a lot of other things attached to it,” said JPMorgan Chase CEO Jamie Dimon, “like maybe a recession, stagflation, [and] lower volumes.”