Is It Bear Stearns II, or Just a Bear Market? The Fed Is Watching.

The hasty and aggressive responses by government, regulators, and the biggest banks stanched the bleeding resulting from the market’s loss of confidence in many medium-size and smaller banking institutions. That should allow the Federal Reserve to stay on course to raise its key policy interest rate again at this coming week’s much-anticipated meeting.

But comparisons to the bailouts during the 2008-09 financial crisis that culminated in the failure of Lehman Brothers in September of 2008 seem misplaced.

The current circumstances also differ materially from those surrounding the collapse of Bear Stearns, which took place exactly 15 years ago this past week, recall Brean Capital’s John Ryding and Conrad DeQuadros, the investment bank’s economists at the time. Back then, they point out, there was no way for Bear to borrow from the nation’s central bank.

In contrast, the Fed, the Treasury Department, and the Federal Deposit Insurance Corp. swiftly protected depositors at both Silicon Valley and Signature banks, while creating the Bank Term Funding Program. That new facility lets banks borrow against securities that have lost value, owing to the steep rise in interest rates engineered by the Fed beginning a year ago.

As of Wednesday, the Fed had lent about $300 billion to banks, including $11.9 billion via the term funding program. But while some pundits declared this a new form of quantitative easing, offsetting the tightening from the reduction in the Fed’s securities portfolio, Ryding and DeQuadros disagree. In a client note, they point out that the pandemic-driven QE in 2020-21 went straight into households via the federal government’s massive stimulus, largely funded through central bank bond buying. This latest reserve injection is unlikely to be lent out to would-be borrowers by those banks mainly interested in husbanding their liquidity.

Along with the $30 billion deposited in
First Republic Bank
(ticker: FRC) by its bigger brethren banks, the actions by the Fed and other regulators appear to have stabilized the markets, if not First Republic shares. They fell 32.8% on Friday, despite the support package announced the previous day. On the week, they were down a massive 71.8%. The protection given to banks’ depositors obviously doesn’t extend to unsecured bond and stock holders.

Despite the media spotlight on the banks, the stock market failed to show any great signs of distress. The Nasdaq Composite gained 4.41%, in its best week since mid-January, with megatechs such as
Microsoft
(MSFT) and
Alphabet
(GOOGL) up 12.4% and 12.1%, respectively, and touted as new havens. The
S&P 500 index
rose 1.43% on the week, while the
Dow Jones Industrial Average
slipped just 0.15%. And most shockingly, Bitcoin’s value jumped 33.3%.

Treasury securities—one of the traditional havens—had a truly wild week. The yield on the two-year note, the maturity most sensitive to expectations of future policy, plunged by 74 basis points (100ths of a percentage point), to 3.846%. That was the most since the week ended on Oct. 23, 1987, which included the Black Monday crash, according to Dow Jones.

Given all this, the Fed is expected to go ahead with a 25-basis-point rise in its federal-funds target rate, currently 4.50%-4.75%, at the conclusion of its open market committee’s two-day meeting on Wednesday. Fed-funds futures put a 65.7% probability on such a move, which would equal the hike at the previous meeting in late January. But the futures market also is betting that this increase will be the last, and is pricing in rate cuts as early as the panel’s June 23-24 confab.

Ed Hyman, who heads Evercore ISI’s esteemed economics team, agrees that Jerome Powell & Co. will probably approve a 25-basis-point hike. He adds that it would be most unusual for the Fed to tighten more amid the strong disinflationary force exerted by falling oil prices (U.S. crude plunged nearly 13% last week, to $66.74, a 52-week low). And, he says, the Fed’s past tightening is likely to result in a recession that shrinks gross domestic product by about 2% over the fourth quarter and the first quarter of 2024.

One well-known (but publicity shy) portfolio manager sees a mild recession later this year, but one likely to hit corporate earnings more than the consensus expects. The initial decline in the bear market ended last October, the result of the revaluation of stocks from the sharp rise in interest rates by the Fed. Following the recovery that continued into the early part of this year, he sees the next leg down developing as profit estimates are cut further.

That doesn’t amount to a crisis, just a typical bear market.

Write to Randall W. Forsyth at randall.forsyth@barrons.com