New York Community Bank and the Federal Reserve, podcast episode 470
Key takeaways from podcast episode #470:
- The Federal Reserve decided to hold interest rates steady after their meeting on January 30th and 31st, 2024.
- The Fed’s policy statement suggested that the current policy rate is likely at its peak, hinting at potential rate cuts in the future.
- Jay Powell, during the press conference, indicated that if the economy evolves as expected, the Fed might reduce policy rates this year.
- The Fed is cautious about reducing rates too soon, fearing a resurgence of inflation, as historical precedents suggest.
- Shares of New York Community Bank stock dropped 38% on January 31st, 2024, after reporting an unexpected fourth-quarter loss and cutting dividends.
- The loan portfolio at New York Community Bank is primarily residential, which doesn’t directly correlate with the issues in commercial real estate.
- The Federal Reserve is conscious of the political implications of their decisions, especially in an election year like 2024, and aims to avoid causing a recession during such times.
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Transcript for New York Community Bank and the Federal Reserve, podcast episode 470
Welcome back to the podcast. This is episode number 470. I am Tom Mullooly, and we are recording this on Thursday, February 1, 2024.
We’re going to be speaking about the Federal Reserve meeting yesterday and their decision to hold the line on interest rates. 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. The two-day meeting was to decide what they should be doing about setting interest rates moving forward.
The way this typically unfolds is they’ll have a two-day meeting, and at two o’clock on the second day, which was yesterday, January 31st, there is an announcement from the Fed.
This is a carefully scripted announcement each time. They will typically work off the previous few announcements and word it very carefully.
It used to not be that way. In the 1990s and in the previous decade, from Greenspan, Bernanke, and even Janet Yellen, 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.
Over the recent years, we’ve now gone to a point where we started having press conferences afterward. It started with every other meeting. Now it’s every meeting where the chairman of the Federal Reserve, in this case, Jay Powell, gets grilled.
Yesterday’s press conference lasted over an hour, where he was 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.
The market was pretty much holding its own. It was pretty flat, up a little, down a little, during the announcement at two o’clock and the start of the press conference. But the market began to sell off because of a statement made by Jay Powell during the press conference.
These were some of the things that he had said during the press conference:
– 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.
Yet, he also added that inflation remains above the goal.
So they’re still looking for that two percent 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 the next direction for interest rates will be down. 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. 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. They then had to raise rates even higher in 1980 and 1981, which 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 up his statement by adding, “We need greater confidence before we reduce policy rates.”
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, which 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.
Powell described this in the press conference as saying the Fed is now in “risk management” mode to prevent moving too soon – or too late. Tom Keene on Bloomberg afterward 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 during the press conference. Powell, in an answer to a question, said, “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 seventy-five basis points. That came out during the press conference.
One of the other things that was mentioned during the press conference is that 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 forty percent of the calculations that go into the Consumer Price Index. As rent stabilizes and then starts to come down, that will be a big driver of the rate of inflation.
Powell was asked if they’ve achieved their goal of a soft landing. He said no, not yet. Adding, it will probably take a couple of years for things like wages to normalize, but this is really where the market took a turn.
Powell said at one point he doesn’t think that a rate cut in March is likely. He said, “At this moment, it appears unlikely that the Federal Reserve will cut rates in March.”
Now, I’m just going to venture away from the script to say that does not mean that they will not cut rates at the March meeting.
All it meant was at three o’clock Wednesday, January 31st, to the Chairman of the Federal Reserve, it appears unlikely 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. It 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 thirty-five or forty points. It really began a tailspin. The S&P 500 started falling pretty quickly. At that point, Nasdaq was already down one percent 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.
Powell went on to say, “Hey, we’re not going to keep it a secret when we have confidence in the inflation indicators.” So what could change some of the thoughts of the members of the Federal Reserve between now and the next meeting they’re going to hold in March?
Well, the first one would be a change in 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 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.”
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 are a lot of loans that are at risk.
We saw one subset of that yesterday with New York Community Bank.
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 there were plenty of depositors that had gone well beyond the $250,000 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 had pretty low coupons. When rates started rising, they couldn’t keep up. The value of their bond portfolio started dropping. The banks got into a situation where they had to move assets around on their balance sheet, and that became a mark-to-market scenario. That’s where things really began to unravel for some of these banks.
How do we bring this all home?
Yesterday, New York Community Bank stock dropped 38%. This was Wednesday, January 31st, 2024. The bank reported a fourth-quarter loss, which was unexpected, and they cut their dividend, which is never a good sign.
Their dividend was cut from $0.17/share per quarter to $.05/share per quarter. The earnings expectation for this quarter was going to be a gain of $0.27 per share. Instead, they reported a loss of thirty-six cents per share.
In their statement, the bank made a comment that they were “adjusting to being a large bank after some acquisitions 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.
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,
– Queens County Savings Bank,
– Roslyn Savings Bank,
– Richmond County Savings Bank on Staten Island,
– Roosevelt Savings Bank,
– Atlantic Bank in New York.
And 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, 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 they made last year, they’re now adjusting to being in this new category. The statement that the company put out yesterday was, “By taking these steps, we are building our capital back, reinforcing our balance sheet, and strengthening our risk management process.”
So there are 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 are only a few analysts that follow the company and the stock. The analyst at Piper Sandler was quoted in The Wall Street Journal saying it “felt like this was a clean-up quarter. The company said, “We’re going to rip off the Band-Aid 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 buyer, 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.
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 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 was less than sixty days before the 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.
I don’t think, after going through the last fourteen or fifteen years where we’ve had rates near zero, 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 (to drop to zero) 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: if you ask folks what was going on in the economy, does the Fed need to lower rates? We went in a fourteen-month period from zero percent interest to five hundred basis points higher – or over five percent 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 and a half. So 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 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.
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
