Federal Reserve Update: What Economists Predict

Generated Title: The Fed's "Well-Managed" Mirage: A Data-Driven Dose of Skepticism

The Federal Reserve has tweaked its supervisory rating framework for large bank holding companies. The goal, according to the Fed, is to ensure ratings reflect the overall health of these institutions, rather than getting bogged down in isolated issues. Vice Chair Michelle Bowman claims the revisions will make sure a bank's "overall condition is the primary consideration." But does the data support this rosy picture? Or is this just regulatory window dressing?

Decoding the "Deficient" Rating

The core of the change revolves around the "well-managed" designation. Previously, a single "deficient" rating in any component (capital, liquidity, governance) could disqualify a firm. Now, a bank can have one "deficient-1" rating and still be considered "well-managed." A "deficient-2" rating, however, remains a deal-breaker. Federal Reserve Updates Supervisory Ratings, Easing ‘Well Managed’ Standard For Big Banks / Fresh Today / CUToday.info

This raises a critical question: what exactly constitutes a "deficient-1" versus a "deficient-2"? The Fed's announcement is suspiciously silent on the specific criteria. We're left to speculate on the nuances that separate these two levels of deficiency. (It's details like these that make a former data analyst like myself deeply suspicious.) Are we talking about a minor paperwork error ("deficient-1") versus a systemic risk management failure ("deficient-2")? Without clear definitions, this new framework risks becoming arbitrary, subject to the whims of individual examiners.

The Bank Policy Institute (BPI), a lobbying group for large banks, seems pleased with the changes. Tabitha Edgens, BPI's Executive Vice President, stated that the updates make the rating system "a more useful tool for regulators by calibrating supervisory measures to more accurately reflect risk." But of course they would say that, wouldn't they? It's their job to spin this as a win for the industry. The real question is whether this "calibration" actually enhances oversight or simply lowers the bar for banks to achieve a "well-managed" status.

The Interest Rate Cut Context

This regulatory shift comes at a particularly interesting time. The Fed is also navigating a complex economic landscape, potentially lowering interest rates.

The Fed has a dual mandate: keep inflation and unemployment low. With inflation showing signs of cooling (the Consumer Price Index rose 3% last month), the pressure to support the labor market through lower rates is increasing. A quarter-point cut would bring the benchmark rate down to a range of 3.75% to 4%, down from its current range of between 4% to 4.25%.

However, this decision isn't without its risks. As Powell himself acknowledged, the September jobs report was delayed due to a government shutdown (a shutdown that feels like it happened a lifetime ago). While the Fed claims to have access to alternative data sources, the lack of official jobs numbers introduces a degree of uncertainty. We're relying on "a wide variety of public- and private-sector data," as Powell put it. And this is the part of the Fed's approach that I find genuinely puzzling. They are willing to hang their hat on alternative data.

How reliable are these alternative sources? Who is collecting this data, and what biases might they have? Are they truly capturing the nuances of the labor market, or are they simply providing a skewed picture that justifies a pre-determined policy decision?

The potential impact of these rate cuts is already being felt in the mortgage market. The average 30-year fixed-rate mortgage dropped to 6.19% as of Oct. 23, marking their lowest level in a year. This could provide a boost to the housing market, but it also raises concerns about fueling another asset bubble.

Is "Well-Managed" Just a Comfort Blanket?

The Fed's simultaneous easing of regulatory standards and lowering of interest rates creates a potentially dangerous cocktail. By making it easier for banks to be deemed "well-managed," the Fed risks creating a false sense of security. At the same time, lower interest rates could incentivize riskier lending practices, further eroding the stability of the financial system. It's like loosening the reins on a horse while simultaneously pointing it towards a cliff. What could possibly go wrong?

The Fed is essentially saying, "Trust us, these banks are well-managed," while simultaneously making it easier for them to achieve that designation. It's a circular argument that lacks empirical rigor.

A Data Analyst's Final Verdict

Smoke and Mirrors

The Fed's actions smack of political expediency. They're trying to appear proactive in supporting the economy while simultaneously downplaying the risks to the financial system. But data doesn't lie, and the data suggests that this "calibration" of the supervisory rating framework is more about optics than substance. I, for one, am not buying it.