May 4, 2026​​​​​​

Show the Whip

I noticed the jockey for the Kentucky Derby winning horse, Golden Tempo, kept putting the whip in the horse’s line of sight without actually using it down the stretch. I think there are rules about how much they can or can’t actually strike the horse, but the jockey never struck him. Just flashing the whip to the horse had the intended effect; it signaled urgency and encouraged acceleration. That combination displayed skilled and controlled riding. The jockey was saying, “give me more!” without actually hitting the horse, and the horse understood the cue.

That is a very good analogy for how the Fed signals the markets. The Fed rarely “whips” the market anymore (abrupt, surprise moves). All the Fed has to do is “flash the whip” and the markets understand what to do, and respond accordingly. Instead of a whip, the Fed uses forward guidance, speeches, dot plots and meeting minutes to signal the market. It’s pretty cool that all the Fed has to do is use those tools, and the markets do what is intended without needing a “strike.” 

A couple of examples: “higher for longer” = tighter financial conditions before any rate move.  “Data dependent” = they are keeping their optionality open, which keeps market players tuned into data markers, and it has the effect of reining in market overaction. They have the market conditioned to tighten or loosen liquidity with only their words.

Of course, the Fed does “strike” the horse with rate movements or balance sheet increases or decreases when they feel words alone are not getting the job done.

Markets can front-run the Fed, and frequently do. Market players make more money by anticipating the next Fed signal, so they very often overshoot one direction or the other. If players get too far forward in the saddle, the Fed has to employ the whip by showing the market they’ve gone too far. 

The key to this game is credibility; credibility is everything. If the horse (markets) stops respecting the cue, the Fed has to act more forcefully.  That is exactly what happened in the late 1970’s, pre-Volker. Volker then had to beat the senses out of the horse to get it to react as desired.  He had to force the market to respect the Fed. It caused a lot of pain to the horse (market).

The Fed also has to be careful not to overuse the flashing of the whip. Just as over-whipping a horse disrupts a horse’s stride, too much jawboning or policy volatility can destabilize markets. 

Cool analogy and all, but what is the takeaway for your bank?

Bank deposit flows, net loan demand or payoffs, and credit conditions (The Big Three) do not respond quickly to most whip flashes by the Fed.  Deposits respond to income cycles, competition and stimulus, not Fed minutes. Loan demand responds to confidence plus project economics, not dot plots. Credit quality responds to cash flow stress, which lags both. Because we are working with people and businesses, and they are decidedly not hanging by every signal the Fed gives, it takes larger trends to catch their attention. The signal-to-noise ratio is off the charts, and trend changes in The Big Three lag, and need large changes before banks notice. So, we don’t need to hang by every signal from the Fed. We don’t need to front-run the Fed. We just need to be perceptive to trend changes. What are those big trends we need to consider now?

Stocks are signaling economic strength, AI driven strength to be sure, but they are betting the new tech will carry the water for a growing economy. Bonds are reflecting no change to rates this year. They also signal long-term inflation concerns and supply realities with higher relative long rates. Credit spreads are not flashing the market. Assuming Warsh gets confirmed, the market is expecting a Fed that does not use its balance sheet to bail out every bump in the road or the legislative branch’s fiscal mismanagement (or at a minimum, use it to a smaller degree). This implies no surges in deposits or large drawdowns.  I said it a couple of weeks ago in the Ticker, and this one continues my theme of a “steady as she goes” economy.

The Fed may be flashing the whip, but your balance sheet shouldn’t flinch. Manage to trends, not headlines; then you will stay on stride while others overreact.

I want to end with trends in capital markets for our Trusted Partner Banks. Bond buying is steady. Banks are comfortable investing in durations between 2 and 5. Most investing is in prepay protected bonds that don’t display extension or call risk via CMO structures, seasoned low coupon MBS, DUS and good old Treasuries. Muni and new issue MBS buying is almost non-existent. Zero Agency Callable buying.  Finally, there is a smattering of one-off illiquid bond buying that seems to be sold to a bank, as opposed to a bank seeking them.

For a discussion of what banks are buying (and not buying), please reach out to your TIB Capital Markets officer.