Now in a Fox Business exclusive is the former Federal
Reserve Vice Chair for Supervision,
Randy Quarles. He's now the Sino Shore Group Co founder
and Chairman.
Randy, I know back a couple of months ago you
had said June would be the first rate cut.
You care to amend that right now on on our
show.
Well, I I think what I've said,
it wouldn't come earlier than June.
If you remember the expectations had been at the beginning
of this year that that there were folks out there
who were saying there'd be five rate cuts over the
course of the over the course of this year.
And our expectation has long been that
interest rates are going to have to stay higher for
longer.
At the outset of this whole inflationary surge,
there were two expectations that we had at the Fed
that interest rates wouldn't have to go as high as
in the past,
maybe 5% or so, and that they wouldn't have to
stay high for as long.
I think the first of those hypothesis has proved out.
I don't believe interest rates really have to go higher
than they are now.
They're plenty high in order to contain inflation.
But the second hypothesis was wrong and they're going to
have to stay higher for longer.
They're still having an effect
and that effect will play out over the course of
the next year but.
But I I don't think there's enough time for the
for the economic indicators to justify a rate cut in
June.
Today the two year the two year yield which tracks
the feds policy most closely pierced
5%. I just have been checking so I didn't know
if it was right there at the moment but let
me get our viewers an absolute up-to-the-minute.
Yep, it's above 5 point O 5%.
Translate that. What does that mean for interest rates?
I mean some people are thinking there might even be
a rate hike by the end of this year.
Yeah, I I again, the interest rate policy has been
being effective.
Inflation is coming down. You know the
PCE core inflation which is what the Fed targets of
all the various inflation measures,
you know has come down each of year over year,
has come down each of the last three months,
but just at a very
gradual rate. So you know,
I do believe that Fed policy is going to be
effective.
It's just going to be effective over a a somewhat
longer period of time.
That'll put some more pressure
on both the economy and the financial system than some
participants have been hoping for.
But ultimately, we're not in for
sort of anything like the
that 1970s, of the 1980s where you have an extended
period of continually high inflation and then a
extended period of dramatically more of a soft landing.
And when you talk about some pressure,
when you put pressure on certain weak areas,
they do crumble. People have been watching the regional banks.
Obviously you had been in charge of oversight for many
of them when you were at the Fed.
We want to talk about the fact that over the
weekend Republic First,
this was a bank regional lender in Pennsylvania,
was shut down by the state's regulator.
Listen, there are 5000 banks in the country,
some will fail. That's the free market.
We understand it. But do you have any concerns,
any flashing lights that you see with higher borrowing rates
for longer,
well higher borrowing rates for longer and in particular the
the inverted yield curve that comes from you know from
sort of robust Fed policy to constrain inflation since they
control the short term interest rates.
So that's what they drive up and and
that's going to invert the yield curve.
Inverted yield curve puts pressure on the financial sector
and if you've got institutions that have highly interest rate
sensitive assets and highly mobile liabilities
that's not every financial institution but that is a a
number of of regional banks they're going to be under
pressure.
I don't expect that any of that is going to
be
is going to create any financial instability.
I think you're going to have institutions that are under
pressure.
I think we're likely to see more of that pressure
play out in the non bank sector really rather than
the bank sector there.
Certainly institutions there that have highly interest rate sensitive assets
and highly mobile liabilities and we have a lot less
visibility into what those institutions are because they're much less
regulated. I think that's where you'll see more of this
play out as interest rates stay at this level for
a longer period of time.
We're talking about real estate,
what would be non financial
that you're talking about the the non bank financial sectors.
A lot of
a lot of real estate credit is provided not from
banks currently.
And
you know nearly half of the
of finance in over half of finance in America is
provided by institutions other than banks,
but many that are structured in the same way with
the
mobile liabilities and interest rate sensitive assets not as regulated
though.
OK. Good to see you.