Jay Powell’s Bad Cop Routine: Intentionally Pushing Banks Off The SLR ‘Cliff’

The Federal Reserve has allowed itself an image of a marshmallow when it comes to the banking system it is (one-third) charged with regulating. First and foremost, along with the two other (redundant) triplets, the OCC and FDIC, the US central bank is not a central bank at all; it is near exclusively a domestic bank regulator. And while “macroprudential” policies are now the normative way for influencing them, rather than actual money the Fed can’t define, measure, nor supply, hardly anyone believes this other approach amounts to anything more substantial than nonserious chiding.

And even then the public, I think, sees high-profile complaining by the big banks as highly effective; Jamie Dimon throws a fit about the SLR, the marshmallows give in.

Not this time, though. Jay Powell has thrown down the gauntlet. Seeking to re-establish some semblance of independence (from Wall Street), he’s taken a hardline on this SLR business. Just a few days ago, when the FOMC last met, during his afterthought press conference the Chairman said he’d announce something about this bank balance sheet metric/penalty in two days.

As has become typical, the press (and markets) immediately wrote down how Powell was sure to give-in yet again. Instead, two days later, all three of the trio spit in everyone’s face:

The federal bank regulatory agencies today announced that the temporary change to the supplementary leverage ratio, or SLR, for depository institutions issued on May 15, 2020, will expire as scheduled on March 31, 2021. The temporary change was made to provide flexibility for depository institutions to provide credit to households and businesses in light of the COVID-19 event. [emphasis added]

I said yesterday on Hedgeye TV with Keith Mccullough that I thought this is just what regulators would do. But why?

There’s more macroprudential to it than just regulators reaffirming dominance over the regulatees. While taking a clearly contradictory stance so very publicly (people have actually been talking about the SLR lately) represents a clear bonus, in the official mind, there’s more nuts and bolts at stake.

Lending first, jobs next, finally inflation.

What I said to Keith was that the chief goal of any Fed policy revolves around lending. Hell, even the press release which first announced the SLR exemption last year made this plain:

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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