Independent Banker - December 2022 - 33

Next: 2022's lending landscape 
there wasn't a single year in that era
that had even a 5% loss. This is what
happens when the Fed promises to get
infl ation back in its 2% box and makes
little headway even as rates have risen
well over 300 basis points (3%). (The
index's decline roughly mirrors the
drop in community bank portfolio
market values.)
Impact on consumers
A number of other sectors have been
compromised by this rate shift. You
may have noticed equity holdings have
" corrected. " It's true that commodity
prices, most visibly oil, have increased
year over year, but those numbers
have declined dramatically since
May, which is a major reason many
economists are projecting a durable
recession for 2023.
And let's not forget homebuyers.
The pace of price increases cooled
off in the second half of the year, but
they were still up by double digits in
2022. Mortgage rates have more than
doubled. Taken together, the averagepriced
home late in 2022 produced
a P&I payment of 52% higher than
the start of the year. This alone could
well cool down the housing market.
Housing supplies are also fi nally
catching up to prepandemic levels.
Retrospectives
And now ... wait for it ... the good
news. Or at least, a look back to the
rate environments that ensued after
aggressive rate hikes by our central
bank. We will use the 2000-01 and
2007-08 periods in this discussion, as
they share several criteria. Both times,
the Fed engineered multiple rate hikes
to get infl ation under control. Another
common trait is they stopped out at
levels that we haven't seen since the
6% range. So, what did the phases
that followed look like?
From early 2000 to mid-2001,
core PCE rose about 0.6%, to about
2.1% annually. Economic activity had
begun to slow, thanks in no small
part to fed funds reaching 6.5% in
2000. The Fed then cut rates all the
way to 3.5% even before the events
of 9/11. The upheaval that followed
produced a run of infl ation well
below 2% all the way into 2004, even
with fed funds as low as 1%. We can
say that the stout medicine from
high fed funds was at least partly
responsible for returning infl ation to
its target.
QUICK STAT
16%
The decrease of the Bloomberg
Agg on a total return basis in
2022-the worst since 1990.
Source: Bloomberg
Much the same happened in the
2007-08 period. Core PCE spent
the better part of that era over 2%,
as the housing market, notably, was
overheating on its way to the historic
meltdown. The Fed again pushed
overnight rates as high as 5.25%
before the Great Recession that began
in 2007. PCE didn't rise back up to
the target level again until the end of
2011. Bond market returns for that
multiyear period were above longterm
averages.
Does past experience foretell future
results? Of course not. But there is
reason to recall that rough patches
in the bond market are followed,
sometimes in short order, with a
return to more typical circumstances.
A normally sloped curve and positive
real yields are still the norm, if
elusive in the current environment.
More on this to follow as we embark
on a new year.
Cheers! 
A normally sloped curve and positive
real yields are still the norm, if elusive in
the current environment.
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
Education on Tap
Quarterly bank
industry update
Stifel's Marty Mosby and
David Kantor present the
quarterly Bank Advisory and
Strategic Services webinar
on Dec. 8 at 10 a.m. Central.
Bank profitability, industry risk
and capital management will
be discussed. One hour of
CPE is off ered. Contact your
Stifel rep to register.
independentbanker.org Q 29
http://www.independentbanker.org
Independent Banker - December 2022

Table of Contents for the Digital Edition of Independent Banker - December 2022
