The Fed's interest rate moves have likely cost banks $900 billion, and it can stop hiking after SVB's collapse, Fundstrat says

• The Fed's interest rate hikes have likely cost banks around $900 billion, Fundstrat's Tom Lee said.
• Lee made the case for central bankers to stop hiking rates, which would be bullish for stocks.
• He's predicted a 20% increase in the S&P 500 this year, with a strong rally taking off between March and April.

The Fed's aggressive rate hikes to control inflation have likely cost banks around $900 billion – and the collapse of Silicon Valley Bank is a sign that central bankers can stop tightening monetary policy, according to Fundstrat's head of research Tom Lee.

In a note on Wednesday, Lee pointed to a recent estimate by the FDIC that US banks were sitting on $620 billion in unrealized losses on their bond holdings at the end of 2022, thanks to the Fed's aggressive rate hikes last year. Central bankers hiked interest rates 1,700% to control inflation – a move that's raised bond yields and weighed bond prices.

But those losses likely extended after Powell warned markets of higher interest rates to come in his testimony before Congress last week, Lee said, estimating that Fed tightening efforts have actually cost US banks around $900 billion in their bond portfolios.

That pain was highlighted by last week's collapse of Silicon Valley Bank, which reported a $1.8 billion loss on its bond portfolio, with the bank's situation deteriorating rapidly over two days until it was shuttered by regulators and taken over by the FDIC. 

The collapse has stoked investors' fears of a 1980s-style banking crisis, leading to brief but intense sell-off in regional bank stocks on Monday. That's a sign financial conditions have tightened enough, according to Lee.

"The Fed hiking aggressively further is delivering even greater pain to the banks," Lee said. "In other words, the Fed's monetary policy is finally 'biting' … and thus, the Fed can take its foot off the gas," Lee said.

Markets have already begun pricing in a softer policy move from central bankers in March, with the majority dialing back their expectations of a 50 basis-point rate hike to 25 basis-points. Lee has floated the possibility of the Fed pausing rate hikes altogether in the near future, which would be a bullish development for stocks.

Lee has made the case that the S&P 500 can gain at least 20% in 2023, erasing the losses for the benchmark index from 2022. Not only has inflation consistently been on the downtrend, but technical indicators are also flashing a positive sign for equities, he said, adding that he expects the strongest rally of the year to take off between March and April.