After the Federal Reserve announced a quarter-point increase in the fed funds rate and also hinted at a potential pause in the monetary policy statement, Treasury Secretary Janet Yellen spooked the markets by stating that the Treasury is not considering or is working on a unilateral expansion of deposit insurance.
What Happened: Just a day after Yellen made reassuring comments that led the market and depositors to believe that all deposits were now implicitly guaranteed, she walked back on the implicit support she hinted at for small banks and depositors, said hedge fund manager Bill Ackman.
Instead, Yellen now explicitly suggested that systemwide deposit guarantees were not being considered, he noted. The fed funds rate of 5% now is a threshold that makes bank deposits that much less attractive, the fund manager said.
"I would be surprised if deposit outflows don't accelerate effective immediately," Ackman said. He called upon a temporary systemwide deposit guarantee to stop the bleeding.
"The longer the uncertainty continues, the more permanent the damage is to the smaller banks, and the more difficult it will be to bring their customers back," he said.
In a separate tweet, Ackman said, "This is a big mistake. We are suffering from self-inflicted wounds."
Yellen's statement combined with a 25-basis-point hike puts even more pressure on the non-systemically important banks, he added.
This is a big mistake. We are suffering from self-inflicted wounds. @SecYellen statement combined with 25bps puts even more pressure on the non-SIBs.
— Bill Ackman (@BillAckman) March 22, 2023
Regional Banks Bleed: After severe bruising in the wake of the trio of bank closures and issues at several others, regional banking stocks began to turn around this week.
Hopes of the government's continued handholding infused some optimism in the space.
The $Spdr Series Trust S&P Regional Bkg Etf (KRE.US)$, which rose about 7% this week through Tuesday, slumped 5.69% to $43.45 on Wednesday.