The Lombard Review
Markets & Finance Special Report

Anniversary: Our first year, graded

Calls vs realised curve

The Federal Reserve Bank of New York at 33 Liberty Street
The Federal Reserve Bank of New York at 33 Liberty StreetPhoto: Beyond My Ken / Wikimedia Commons, CC BY-SA 4.0
1 min read Data: FFR 5.25–5.50% vs 2.25–2.50%

One year ago, this column commenced with a simple premise: that the most aggressive central bank tightening cycle in forty years would inevitably collide with private balance sheets. Twelve months later, the federal funds rate sits between 5.25 and 5.50 per cent, compared to 2.25 to 2.50 per cent when we began. The market consensus that anticipated an immediate recession and early rate cuts has been utterly confounded by economic resilience.

The U.S. Treasury Building, Washington
The U.S. Treasury Building, WashingtonPhoto: MeanieHyaena / Wikimedia Commons, CC BY 4.0

The Realised Path

Yet defying recession is not synonymous with escaping consequences. Over the past twelve months, the yield curve has inverted violently, three major regional banks have collapsed into receivership, and the cost of sovereign debt service has doubled. The financial system has absorbed the initial rate shock through legacy cash buffers and fixed-rate hedges; the true test begins as those protections expire.

The Canary Wharf financial district, London
The Canary Wharf financial district, LondonPhoto: M R Karim Reza / Wikimedia Commons, CC BY-SA 4.0

A year of hyper-tightening has demonstrated the surprising resilience of private balance sheets, but it has merely delayed the refinancing reckoning rather than averted it.