Smokey the Bear, Unintended Consequences and U.S. Banks

Have you heard of the law of unintended consequences?

No? Well, I bet you have heard of Smokey the Bear. Let’s talk about why he’s a villain.

Since 1944, the United States Forest Service has used good ol’ Smokey as part of its marketing campaign to deter woodland fires. The problem? Forest fires are critical to burning away the underbrush so larger trees can survive and forests can thrive. But after decades of effective fire prevention from our friend Smokey, many plants were dying in U.S. forests.

You see, sometimes the cure can be worse than the disease. After a series of sharp increases in interest rates in the last year, we are beginning to see unintended consequences throughout the global economy beyond slowing economic growth.

Systemic banking concerns emerged due to stresses in the regional banking system. In reaction to the banking issues, expectations for continued interest rate increases in the United States, and around the world, have shifted significantly. Many investors are now expecting a more measured and slower pace of interest rate increases to a lower terminal level than previously believed, so as not to create additional stress on the banking system and other areas of the global economy.

The challenge for central banks in this scenario is that inflation remains at levels well north of intended inflation targets. Additionally, the rate of decline in inflation has recently slowed while labor markets remain very tight; the scenario sets up a delicate conundrum. In the U.S., add the additional component of intensifying debt ceiling timelines. This is the expected backdrop for the foreseeable future, which most likely will elevate volatility and put a floor under perceived safe haven assets like gold and the dollar until a clearer trajectory in risk assets is achieved.

All eyes this week will be on the Fed with an expected hike of 25 basis points on Wednesday. The Bank of England also has a rate decision on Thursday. The delicate “tug of war” between inflation and policy will be the backdrop for markets going forward.


  1. S. Regional Banks – The closure of Silicon Valley Bank and Signature Bank and significant price declines of First Republic and other U.S. regional banks created concern of the U.S. banking system’s fragility. Injections of $30 billion of capital from a consortium of large U.S. banks have eased, but not eliminated, investor concerns.
  2. Credit Suisse – Deposit declines, coupled with messaging from Credit Suisse’s 10% stakeholder that they could not provide more capital, sent shares plummeting until a $54 billion liquidity injection by the Swiss National Bank stabilized the firm last Thursday, but investor sentiment remains fragile.
  3. Policy Divergence – With implications of interest rate increases starting to emerge in various places, central banks have started to diverge from their coordinated stance. The ECB raised rates 50 basis points last Thursday, while the PBOC lowered required bank reserve ratios, and the U.S. is expected to raise rates by 25 basis points this week to match just a 25 basis-point hike from the Bank of Canada.


  • German Producer Prices


  • Eurozone Business Expectations
  • German Business Sentiment
  • Canadian Inflation
  • S. Existing Home Sales


  • UK Inflation
  • UK Producer Prices
  • S. FOMC Rate Decision
  • Brazil Selic Rate Decision


  • BOE Rate Decision
  • S. Initial Jobless Claims
  • S. New Home Sales
  • Eurozone Consumer Confidence
  • Japan Inflation
  • UK Consumer Confidence


  • UK Retail Sales
  • Eurozone PMI’s
  • UK PMI’s
  • S. PMI’s
  • S. Durable Goods Orders


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