Mullooly Asset Management
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NY Community Bank & the Federal Reserve
Ever wondered how a single statement from the Federal Reserve can send shockwaves through the financial markets? That's exactly what we're unpacking in this episode as we scrutinize the Fed's latest move to hold interest rates steady and the subsequent market tremors. Join us as Chairman J Powell's press conference is dissected, providing insight into the Fed's delicate balancing act between economic stability and inflation. We take you through the historic evolution of the Fed's communication, revealing how the art of reading between the lines could forecast future rate cuts. With an economy in flux, we dig into the nuances of decreased rent costs and their potential effect on inflation trends, all while Powell tiptoes around confirming a soft landing.
Then, we shift gears to the ripple effects felt by New York Community Bank after its Q4 earnings reveal a significant loss and dividend cut. We tackle the tough questions: What does NYCB's recent acquisition spree signify for its future and how does its predominantly residential loan focus fare amidst other banks' commercial real estate woes? Listen as we connect the dots between the Fed's cautious rhetoric, a turbulent stock market, and the broader implications of past bank failures. With a narrative that intertwines monetary policy and market reactions, this episode is a treasure trove for those seeking to understand the complex dance of economic forces at play.
Welcome back to the podcast. This is episode number 470. I am Tom Malouli and we are recording this on Thursday, february 1st 2024. We're going to be speaking about the Federal Reserve meeting and their decision to hold the line on interest rates, and we also want to spend some time talking about New York Community Bank and what happened yesterday as well. The Federal Reserve held interest rates steady after their two-day meeting this week, they met on Tuesday, january 30th and yesterday, wednesday January 31st a two-day meeting to decide what they should be doing about setting interest rates moving forward.
Speaker 1:The way this typically unfolds is they'll have a two-day meeting. At 2 o'clock. On the second day and that was yesterday, January 31st there is an announcement from the Fed. Now this is a carefully scripted announcement. Each time they will typically work off the previous few announcements and worded very carefully. It used to not be that way. We would just get a one-liner in the 1990s and the previous decade from Greenspan and Bernanke and even Janet Yellen, where they would just issue a one-liner we're lowering rates or we're raising rates or we're leaving rates as is. That's all you would get. Over time, they started putting out a more carefully scripted message about the economy and the reason why they were holding the line or dropping rates or raising rates, you would get something a little more.
Speaker 1:Over the recent years we've now gone to a point where we started having press conferences Afterwards. It started with every other meeting, now it's every meeting where the chairman of the Federal Reserve, in this case J Powell, gets grilled. Yesterday's press conference lasted over an hour where he gets grilled on everything. Unfortunately, during the press conference where the Fed chairman is talking off the cuff on an ad-lib basis, occasionally things will be said that weren't in the script. That is sort of what happened yesterday in the markets on Wednesday January 31st, so the market was pretty much holding its own. It was pretty well flat up, a little down a little during the announcement at 2 o'clock and the start of the press conference. But the market began to sell off because of a statement made by J Powell during the press conference, and so these were some of the things that he had said during the press conference.
Speaker 1:The path forward for interest rates seems uncertain. The policy rate right now is well into a restrictive territory, so it's actually holding back the economy. But yet he also added that inflation remains above goal, so they're still looking for that 2% annualized rate of inflation. They also added a line to the Fed policy statement that the current Fed policy is likely at its peak, indicating that rates are going to be the next direction for interest rates will be down. And Powell mentioned during the press conference that if the economy evolves as they expect, they'll dial back their policy rate this year, indicating rate cuts. Powell went on to say that the economic outlook is uncertain that's always going to be the case and the ongoing progress on inflation is not assured. This is important.
Speaker 1:In the late seventies the Federal Reserve was very aggressive in raising interest rates to help stem inflation. When they got their first whiff of disinflation, the Fed backed off. They actually started cutting rates. But what happened was inflation came back and then they had the rates raise rates even higher in 1980 and 1981. And that caused back-to-back recessions. That was a real problem. Powell is a student of history and well aware that if they back off now they may be inviting inflation back to the party. So he followed his statement by adding we need greater confidence before we reduce policy rates. So then Powell went on to say almost everyone on the Federal Reserve Open Market Committee believes it will be appropriate to reduce rates, and he doesn't really know where the neutral rate of interest is. There's a tightening rate. They indicated that they feel that's where they are now. Then there's a loosening rate where the Fed policy may be too loose. They don't know where the actual neutral rate is going to be, and so Powell described this in his press conference as saying the Fed is now in risk management mode to prevent moving too soon or too late. Tom Keen on Bloomberg afterwards said you saw a very timid Federal Reserve in action today. That was very well said, but this is where things started to fall apart.
Speaker 1:During the press conference, powell in an answer to a question, said hey look, we weren't actively considering a rate cut at this meeting and there's a wide disparity of views on the committee. There was no proposal on the table to cut rates at this meeting. He also added at one point that the consensus view of the Federal Reserve members was for three interest rate cuts this year, so that would be 75 basis points. That came out during the press conference. One of the other things that was mentioned during the press conference is he Powell thinks that lower rent costs are coming and they will feed through. We've talked about this on a couple of different podcast episodes where rent or owner occupied equivalent rent that's a mortgage payment has been falling, and falling steadily. That makes up over 40% of the calculations that go into the consumer price index rent. So as rent stabilizes and then starts to come down, that will be a big driver with the rate of inflation. Powell was asked if they've achieved their goal of a soft landing. He said no, not yet. It'll probably take a couple of years for things like wages to normalize.
Speaker 1:But this is really where the market took a turn, powell said at one point there was he doesn't think that a rate cut in March is likely. He said at this moment. At this moment, it appears unlikely the Federal Reserve will cut rates in March. Now I'm just going to venture away from the script to say that doesn't mean that they will not cut rates at the March meeting. All it meant was at 3 o'clock Wednesday, january 31st, to the Chairman of the Federal Reserve it appears unlikely that the Fed will be cutting rates at the March meeting. A lot can change over the next six weeks. We're going to get two more swings at the gross domestic product to see how the economy is moving along. We're going to get more indications of how the economy is handling inflation. So we'll get more readings, more data before that March meeting Doesn't mean he's ruling it out. He just said from his point of view on January 31st, a cut at the March meeting doesn't really seem likely, and so with that the Dow Jones was up 35 or 40 points.
Speaker 1:It really began at tailspin. The S&P 500 started falling pretty quickly. At that point NASDAQ was already down 1% for the day. That just went on to continue. The NASDAQ at one point was down 1.8%. So that was a pretty significant move for the day. But that had started because we also saw earnings from some of these larger tech companies earlier as well. So Powell went on to say, hey, we're not going to keep it a secret when we have confidence on the inflation indicators.
Speaker 1:So what could change some of the thoughts of the members of the Federal Reserve between now and the next meeting that they're going to hold in March? Well, the first one would be a change of inflation data. If the inflation data continues to cool off as it has been, that could be a significant driver. The second factor could be what's happening with the unemployment or the employment picture If we see more companies laying off employees or indicating that they will lay off employees. That will point to some softness in the economy and that may be enough of a driver for the Fed to say, hey, let's not wait any longer, let's cut rates and help stimulate the economy.
Speaker 1:But one of the other things that didn't really come up in conversation at the press conference with Powell was what's happening with banks and their loan portfolios. There are lots of commercial real estate loans that are due to be rolled over in 2024 and even 2025. Large amounts that are stuck at some pretty significantly high rates. They could use some relief. There's a lot of empty office space around the country. There's a lot of loans that are at risk. We saw one subset of that yesterday with New York Community Bank.
Speaker 1:Interesting to note that a year ago at this time in February and spilling over into March of 2023, we saw three bank failures Silicon Valley Bank, signature Bank and first republic. What happened with those banks is that the there were plenty of Depositors that had gone well beyond the two hundred and fifty thousand dollar fdic threshold and triggered a run on the bank. When these banks started running into problems with their bond portfolios, they had loaded into bonds to try and bring in additional income, but the bonds that they bought were pretty low coupon. When rates started rising, they couldn't keep up value of the bonds. Their bond portfolio started dropping. They got into a situation where they had to move assets around on their balance sheet and that became a mark to market scenario and that's where things really began to unravel for some of these banks. How do we bring this all home?
Speaker 1:Yesterday, new York Community Bank stock dropped thirty eight percent. This was Wednesday, january thirty first, twenty twenty four. The bank reported a fourth quarter loss, which was unexpected, and they cut their dividend, which is never a good sign. The dividend was cut from seventeen cents per share per quarter to five cents per share per quarter, so the earnings expectation for this quarter was going to be a gain of twenty seven cents per share. Instead, they reported a loss of thirty six cents per share. In their statement, the bank made a comment that they're adjusting to being a large bank After some acquisitions that they've made, one in particular we're going to talk about. They now have more than a hundred billion dollars in assets, which moves New York Community Bank into a new category of banks. They're now considered one of the larger banks.
Speaker 1:If you've not heard of New York Community Bank or you're unfamiliar with them, let me just tell you what banks they are, because you may actually know them. The New York Community Bank is a holding company that owns several banks. They own Community Bank in New York. They own Queens County Savings Bank. They own Roslyn Savings Bank. They own Richmond County Savings Bank on Staten Island. They own Roosevelt Savings Bank. They own Atlantic Bank in New York. They own here in New Jersey a bank called Garden State Community Bank. They also bought Amtrust in Florida and Arizona. They own Ohio Savings Bank. They bought Flagstar Bank, which they actually bought from Lehman Brothers, and Flagstar is all over the country and last year they bought the assets and the liabilities of Signature Bank. I just mentioned a moment ago that at this time last year three large bank failures were made. At this time they had bank failures Silicon Valley Bank, first Republic and Signature Bank. New York Community Bank was the rescuer that came in to take over the assets and liabilities of Signature Bank. With this purchase that they made last year, they're now adjusting to being in this new category.
Speaker 1:The statement that the company put out yesterday is hey, look, we're taking. They didn't say, hey look, I'm just saying that they said we are. By taking these steps, we are building our capital back, we're reinforcing our balance sheet, we're strengthening our risk management process. So there's a lot of folks that are going to point to commercial real estate. But you need to look at New York Community Bank's loan portfolio. It's mostly residential. It's hard to connect the dots between what's happening, or perceived to be happening, with commercial real estate and what's happening with New York Community Bank. There's only a few analysts that follow the company and follow the stock. This analyst at Piper Sandler was quoted in the Wall Street Journalist saying it felt like this was a cleanup quarter. The company said we're going to rip off the bandaid all at once. He doesn't see systemic issues with their loan portfolio. When one bank takes over another, it's usually coordinated through the FDIC. The money to cover bank losses comes from the buying, the new acquiring bank. Some of it does come from the FDIC insurance fund, but most of the money comes from the new bank that is taking over. This looks like an isolated incident. I was very happy to see that Powell, in his press conference, was not asked about New York Community Bank and was not asked about commercial real estate at length during the press conference.
Speaker 1:One other thing to keep in mind when we're talking about the Federal Reserve and interest rates. The Federal Reserve wants to stay out of politics and 2024 is an election year. It's never been written anywhere that the Fed doesn't want to move during the election cycle, but it sure seems like a funny coincidence. It's been said for years, however, that the Fed doesn't want to cause a recession in an election year. The only exception I can think of in recent memory where the Fed had to take some drastic moves on interest rates in an election year was in 2008. The Fed had to lower rates aggressively through the Lehman implosion and the great financial crisis that happened. It started in 2007 and wound its way through 2008 and into 2009. The Fed had to lower rates aggressively. Lehman filed for bankruptcy on September 15th, that's less than 60 days before an election. Interesting to note that while the Fed was lowering rates and providing liquidity to the marketplace, they didn't lower rates to zero until late December in 2008.
Speaker 1:I don't think. After going through the last 14 or 15 years where we've had rates near zero, I think, as we've said on other episodes of the podcast, I don't think we're going to see very low rates again. I think we'll see rates lower than where they are now. But I don't see a need, unless something really wacky happens. I don't see a need for the Fed to cut rates aggressively. We've said this now on several episodes.
Speaker 1:Where, if you asked folks what was going on in the economy, does the Fed need to lower rates? We went in a 14-month period from 0% interest to 500 basis points or over 5% on short-term interest rates, and the economy didn't collapse. In fact, the economy has continued to grow one quarter after another over the last year, year and a half. The Fed is in no hurry to lower interest rates. If we do see some cracks in the economy, these cuts may come sooner than expected. But again we're on hold. The Fed has acknowledged that they're done raising interest rates. We just don't know when they're going to be lowering rates. That's going to wrap up episode 470. Thanks, as always, for tuning in.
Speaker 2:Tom Malouli is an investment advisor representative with Malouli Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malouli Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Malouli Asset Management may maintain positions and securities discussed in this podcast.