Three Banks and the Shock Collapse of the Financial Industry 4th rescue All eyes are on the US Federal Reserve (Fed) deciding next week whether to continue raising interest rates.
Many analysts see gains of more than 0.25 percentage points just two weeks after Fed Chairman Jerome Powell suggested interest rates could be even higher than previously expected to keep inflation in check. Not expected, but some experts are urging policymakers to hold the line for fear, further destabilizing the banking system.
This predicament highlights several competing issues facing the Fed.Major sectors of the economy are doing well, while inflation continues More than double Although the Fed’s interest rate target is 2%, the Fed is keenly aware that any signs of a softening fight against inflation could lead to another wave of price increases.
At the same time, the Federal Fund’s rate hike could magnify problems at other financial institutions that have caused panicked depositors to withdraw money from Silicon Valley banks.
“We are moving from a no-landing to a hard-landing after a financial disaster,” Torsten Throck, chief economist at private equity firm Apollo Global Management, wrote in a note this week, citing the Fed as officials said. predicted to stabilize interest rates when he met with . March 21-22.
Nationwide chief economist Kathy Bostjancic also believes the current stress on the country’s banking system may cause the Federal Reserve to reconsider raising rates next week.
“A lot of people were surprised, even myself, that the Fed was raising interest rates. [4.5 percentage] 11 months to the point and nothing broke. The view that the Fed can’t raise rates so quickly unless something happens is finally justified,” she told CBS Moneywatch.
Financial failure was one of the reasons SVB collapsed, and analysts say rising interest rates played a key role in its collapse. As customer deposits flooded in during the pandemic, banks grew rapidly and invested much of these funds in long-term government and mortgage-backed securities.
However, the SVB investment lost value as the Fed raised interest rates. Banks ran out of deposits, just as customers rushed to withdraw money, horrified by the potential loss of SVB. The concern now is that this pattern could repeat itself with other banks that are not ready for further rate hikes.
“There are also concerns about the balance sheets of regional banks,” Bostjancic said. “Banks have strong evidence that significant sums have been invested in government bonds following this tremendous inflow of deposits. Other banks are facing that problem.”
Already, some customers of smaller and regional banks have moved their funds to the largest institutions, Financial Times correspondent Steven Gandel told CBS News.
Did the Federal Reserve Create This Confusion?
What caused SVB deposits to grow so quickly in the first place? While more Americans had cash in the early days of the pandemic, the tech industry experienced explosive growth. Both factors were helped by the government’s response to the COVID-19 crisis, economists said. That meant keeping interest rates at zero for months after the initial crisis of 2020 passed, while keeping consumers and businesses in cash.
The danger now is that the Fed, which has stepped too hard on gas in recent years to keep the economy moving forward, is hitting the brakes and risking collapse.
“Like a fool, the U.S. Federal Reserve overreacted to subdued inflation and eased financial conditions too much during the coronavirus crisis,” Will Denyer of Gavekal Research said in a report this week. ” he pointed out. “The risk now is that the Fed has gotten too far behind the wheel … it will likely tighten terms too much and start a disinflationary process that will overshoot to the downside and trigger a recession,” he said. .
Tight financial environment
The Fed’s main tool for controlling inflation is to use the benchmark overnight lending rate to slow the economy. said that inflation is now sufficiently low on its own without needing additional help from the Fed. further suppresses
“Going forward, banks, especially small and medium-sized banks, are likely to tighten their credit standards significantly,” predicts Nationwide’s Bostjancic. “Fed officials need to consider that more prudent bank lending will put additional brakes on economic activity, which could be significant.”
In contrast, the Fed will very likely decide that it has taken sufficient steps to strengthen its banking system and continue to push rates higher in the wake of the collapse of the SVB and New York signatories. After these failures, the Fed created a new lending program that effectively insured other banks against losses on Treasuries for up to a year.
In conclusion, the central bank may choose to maintain its rate hike policy as a sign of confidence in policy action and a relentless commitment to keeping inflation under control.
“What are the decisions that send the message that they are still wary of inflation and believe in the stability of the banking system? What are the messages that represent stability and confidence?” Washington analyst Raymond James asked Ed Mills. I think the Federal Reserve will be fine with another week to digest it.”
“The banking industry is about as confident as capital, and the banking industry is very capitalized at the moment,” Mills added. “But there’s a real problem with confidence. “