Banking and Inflation-All’s Well That Ends Well? Not So Fast…

March Recap and April Outlook

Equity markets, using the S&P 500 index return as a proxy, at first glance appear to have shrugged off the mid-month drama of multiple domestic, regional bank failures and the forced sale of a massive Swiss bank.

Attention was temporarily diverted from the economy’s star attractions, CPI and the Fed, but it quickly came back to the familiar talk track: obsessing over consumer sentiment, inflation, and when the rate hikes will stop.

However, there is definitely a linkage, and while Fed governors are probably not celebrating bank failures, the resulting removal of liquidity from the economy as banks pull back on lending will likely help the Fed contain inflation. But it will also increase the risk of recession, as the Fed will have less control and ability to maneuver with rate hikes.

While this may mean that the Fed may pause on rate increases sooner than expected, for now, the Fed played it safe and went with a 25-basis point hike at the March meeting.

Let’s get into the data:

  • 12-month CPI was 6.0% in February. The Bureau of Labor Statistics reported the annual number marked the smallest 12-month increase since September 2021.
  • Consumer sentiment fell to 62. The University of Michigan’s preliminary March reading on the overall index of consumer sentiment experienced the first decline in four months but is still higher than any reading since May 2022.
  • Consumer confidence in the short term is still below 80. The Conference Board’s Expectations Index captures the short-term outlook for the economy. At a reading of 73, it was higher than in February. But readings below 80 have often signaled a recession is coming in the next year.

What Does the Data Add Up To?

The impact of bank failures is going to take a while to be fully felt in the economy. The pullback in lending is likely already underway as banks trim balance sheets in anticipation of either new regulations or a further weakening economy. To banks, loans are assets, which is why we talk about banks reducing their balance sheets when what’s happening is they are slimming down their loan books.

Deposits have taken a hit for smaller regional banks, and money has moved either to bigger banks or to money market funds, which have experienced large inflows. It may engender another round of bank consolidation, as smaller banks either merge or get bought up by bigger banks.

Regulatory measures will take a while to be discussed, voted on, and implemented. But this doesn’t look like 2008 – 2009. While the economy may have moved closer to recession as the money supply dries up, the markets appear to believe the impact of new banking regulations on regional banks and tighter lending standards won’t be significant outside the financial sector. 

What does this mean for the Fed? Chairman Powell actually quantified the impact of bank stress and tighter credit as being “the equivalent of a rate hike or perhaps more than that.” However, he did not go as far as lowering the terminal Fed Funds rate, which remained at 5.1% after the Fed’s March meeting, the same as it was in the last estimate in December. The majority of Fed officials – 10 out of 18 – expect only one more rate increase this year.

Whether this means the Fed will begin cutting sooner than expected or will pause to give the new impacts to the economy time to be felt will be data-dependent. However, the two main inputs of the strong labor market and very slowly deflating inflation aren’t going to give Powell any room for error. 

Chart of the Month: The Last Few Years Captured in One Rising Number

Inflation bounced wildly up, housing prices increased, and the cost of materials to build or repair houses also skyrocketed due to supply chain disruptions. The one number to capture them all? Your homeowner’s insurance. 

Source: Data: Insurify; Note: Insurance rate is for a policy with coverage levels of $250,000 dwelling and $300,000 liability, no claims history, and good credit; Chart: Axios Visuals. *2023 data is projected.

Equity Markets in March

  • The S&P 500 was up 3.51%
  • The Dow Jones Industrial Average rose 1.89%
  • The S&P Mid-Cap 400 returned -3.41%
  • The S&P Small-Cap 600 returned -5.38%

Source: S&P. All performance as of March 31, 2023

After taking a beating throughout the rate hikes of the last year, the poster children for growth stocks – Information Technology – had a gain of 10.93% which added 2.97% to the S&P 500 Index’s return and helped overcome Financials’ 9.55% drop for the sector and 1.13% cost to the index. The first quarter return was 7.50% for the overall index.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 3.48%, a drop from February’s 3.98 and almost even with the end of January. The 30-year U.S. Treasury ended February at 3.92%, down from 3.66% last month. The Bloomberg U.S. Aggregate Bond Index ended March with a return of 2.53% and is positive for the quarter at 2.96%. The equity and bond markets remain positively correlated.

The Smart Investor

Tax season can be exhausting even for people who aren’t CPAs. But before you put those tax thoughts away for another year, take a minute to see if there’s anything you can do differently for next year.

  • Are you taking advantage of tax-efficient savings in HSAs, FSAs, and retirement plans?
  • How about savings for kids’ college? If your state offers a tax break for a 529 plan – even if you haven’t been saving for years, you may be able to fund one and then take the money out in the same year to pay college costs and avail yourself of the tax break
  • Are you setting up lower taxes in retirement by converting to a Roth account?
  • Are you taking advantage of the spousal IRA provisions, if only one spouse is working?
  • How about charitable giving? Getting a plan in place now can eliminate year-end scrambles
  • Are you planning any asset sales this year? How will you structure them?
  • Is your estate plan in place? Have you set up a trust?

The goal for tax planning isn’t to lower your taxes in any one year – it’s to plan ahead and pay as little in taxes as possible over the course of your working life and your retirement and then pass on as much as possible to your loved ones.


This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA


The information in this document is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, University Financial Strategies, LLC.(referred to as “University Financial Strategies”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement and suitability for a particular purpose. University Financial Strategies, LLC.does not warrant that the information will be free from error. None of the information provided in this document is intended as investment, tax, accounting or legal advice,  as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall University Financial Strategies, liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this document, even if University Financial Strategies, LLC.or a University Financial Strategies, LLC.authorized representative has been advised of the possibility of such damages. In no event shall University Financial Strategies, LLC.have any liability to you for damages, losses and causes of action for accessing this document. Information in this document should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. University Financial Strategies,  LLC (“UFS”) is a registered investment adviser offering advisory services in the State of  North Carolina and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by UFS in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.All written content on this site is for information purposes only. Opinions expressed herein are solely those of  UFS, unless otherwise specifically cited.Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.All information or ideas provided should be discussed in detail with an advisor, accountantor legal counsel prior to implementation.