We hope everyone had a great Halloween. As usual, we wanted to bring together some key articles that evaluate what is going on in our banking environment right now. It’s our belief that the tea leaves are pointing toward a recession in the near future, and news articles are supporting this statement. We’re not trying to spook anyone, but hope you are aware and making the preparations needed to get recession ready.

If you need help understanding how this could affect your bank, please don’t hesitate to reach out to us at (918) 791-0699 or by emailing us at info@communitybankadvisors.com.


The Federal Reserve could be dragging us into a recession (source)

  • The effective Federal Funds rate is currently at 2.18%.
  • The average Federal Funds rate from 2000-2015 was 1.71%.
  • The Federal Reserve indicated that the agency is striving to raise interest rates to a “neutral rate”.
    • Observers believe this would be in the 3.25-3.50% range.
    • The history of the Federal Funds rate in the last 18 years does not indicate that it ever stabilized anywhere near this rate.
  • The average Federal Funds rate since it was first published in July 1954 has been 4.80%.
  • It appears that the Fed has made up this concept of a “neutral rate” since there is little evidence it has ever existed before.
  • Ex-Fed Chairman Volker thinks that the Fed may have made up the 2% number as a convenience.
  • The Federal Reserve is shrinking its balance sheet at the fastest rate recorded since it began publishing these numbers in 2002.
    • In the past 12 months since it began shrinking, assets are down by $262 billion or 6.3%.
  • From 2000-2017 the growth of the nation’s money supply has been 6.7% per year.
    • Year to date, on an annualized basis, money supply is growing by 3.4%. This is almost half the longer term growth rate.
  • In the past 12 months, the growth of nominal GDP has outpaced the growth in money supply.
  • The economy needs increasing amounts of money to grow. The financial markets need increasing amounts of money to expand. The Federal Reserve has slowed the growth of available money.


Fed reportedly ready to change more banking regulations (source)

  • This week, the Federal Reserve is expected to vote on standards that would change the way big banks are regulated, according to a Dow Jones report.
  • Under the plan, banks would be divided into categories based on risk factors, including size, international activity, off-balance sheet exposure, and levels of short-term funding.
  • The rules would change the asset thresholds for certain levels of risk scrutiny for “advanced approaches capital rules.”
  • The levels would rise to $700 billion assets from $250 billion and $75 billion in cross-borders activity from $10 billion.
  • These moves are expected to be voted on October 31st, and come as Congress looks to loosening the reins on banking regulations following the post-financial crisis reforms.
  • No comment from Fed officials.


New Home Sales Fall, Inventories Rise on Faltering Demand (source)

  • Sales of new homes in the US slumped for the fourth consecutive month and inventories swelled to the highest level in years, suggesting the housing market is falling deeper into a weak stretch.
  • Purchases of new construction single family homes (a narrow market of all US home sales) have fallen 5.5% in September.
    • This is the slowest rate in 2 years.
  • Inventory rose to a 7.1 months’ supply, the highest level since March 2011.
  • Almost all US regions experienced new-home sales declines last month, with the West seeing the largest monthly drop since the end of last year.
  • In the broader housing market, inventory has been tight, driving up home prices and pricing some potential buyers out of the market.
  • Skilled construction labor shortages, rising input costs and rising mortgage rates are also making home buying more expensive.
  • Sales of previously owned homes fell 3.4% in September from the previous month, continuing the largest slump for such sales in 4 years.


Fed Report Sees Optimism About Growth, but Growing Concerns About Tariffs (source)

  • Businesses were still optimistic about the economy’s growth pattern but showed concerns that tariffs would continue to push up costs.
  • Most of the Fed’s 12 districts reported modest to moderate economic growth at the beginning of fall.
    • The report was based on data collected on or before October 15th and showed uncertainties, particularly among manufacturers, regarding the impact of labor shortages and trade disputes.
  • Many businesses have or expect to pass along tariff-related price increases to customers, but in some cases, are unable to.
  • Three manufacturing companies in the Boston Fed district said they faced higher input prices resulting from tariffs on Chinese products, and they expected to or already had raised prices on consumers.
  • Some businesses are looking to import materials from places other than China.
  • Elsewhere, employment rose at a modest or moderate pace in most districts.
  • Some manufacturers in the Dallas Fed district, mentioned labor shortages as a challenge to growth.
  • Separate Fed reports showed that the words “shortage” and “bottleneck” are coming up more in the beige book.
  • In the Philadelphia Fed district, one firm noted the difficulty of starting a third shift due to the shortage of workers.
  • Labor shortages should translate into a pickup in wages, as employers feel pressure to ramp up pay to attract workers.
  • The labor department has reported continued hiring and that average hourly earnings for private-sector workers grew 2.8% from a year earlier in September.