MNI INTERVIEW: Fed To Add SVB To Statement-Ex Treasury Aide

The Federal Reserve will likely add language about market turmoil to its decision next week though it appears premature to alter the path of monetary policy itself, former top Treasury official Mark Sobel told MNI.

The collapse of Silicon Valley Bank and signs of trouble at Credit Suisse mean any changes to Fed policy next week are still evolving on a day-to-day basis, Sobel said by phone Wednesday from Washington.

"Given the market turmoil set off by SVP and continuing today with Credit Suisse, you’d have to say it’s the elephant in the room and I don’t think the Fed statement can ignore the elephant in the room,” said Sobel, U.S. Chairman at the OMFIF (Official Monetary and Financial Institutions Forum) think-tank. He previously was Treasury Deputy Assistant Secretary for international monetary and financial policy.

U.S. moves around Silicon Valley Bank "implicitly guaranteed the entirely of deposits in the banking system, and that should quell the discomfort,” Sobel said. “Given what’s going on in the markets today, it would be vastly premature” to say the moves so far are enough to be effective, he said.

“If things continue, you saw how the Fed responded to the 2008 crisis, and in the pandemic, by opening up the alphabet soup of facilities, so if other markets start freezing up, they always have those kinds of options, swap lines and things like that,” Sobel said.

Officials could look at changing the path of monetary policy if financial instability threatened serious economic fallout more properly within the Fed's dual mandate, Sobel suggested. U.S. inflation still appears sticky and the job market robust, he said. (See: MNI INTERVIEW: Fed Likely To Hike 25BPs Next Week- Ex Official)

“For many years Fed speakers have said there should be separation or as much separation as possible between financial stability and monetary policy,” he said. “I find it interesting how completely that view” is now being “seemingly being swept away.”

One thing to watch is whether clients of smaller banks move deposits to systemically important banks, further concentrating the industry, Sobel said. There also needs to be an investigation of what appears to be "a major supervisory failure on the ground," he said.

“We need probably to have a far more extensive list of what qualifies as and should be regulated as systemic banks,” he said.