Is PacWest Bancorp the next regional bank to watch implode?… The game is rigged, and the worst is yet to come

The Fed Has Few Good Options. The Risk of a Misstep Is Growing.

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The problem is that the job is far from over, and the most difficult days lie ahead. As the central bank’s policy committee gears up for its May 2-3 meeting and what is widely expected to be a 10th rate hike, it will be embarking on a new and more volatile phase in its tightening cycle, marked by far less clarity than what has come before. The risk of a misstep is growing, and the consequences of over- or undershooting would be severe.

The central challenge for the Fed is that the economic outlook is souring at the same time that progress on reining in inflation is stalling out. Economic growth in the first quarter decelerated more than expected, data out this past week showed, while the Fed’s preferred inflation gauge is down less than a full percentage point from its peak and still more than double the bank’s 2% inflation target.

At the same time, the financial sector is on increasingly unsteady footing. Higher rates have wreaked havoc with bank balance sheets; the industry’s unrealized losses on securities totaled more than $620 billion in the fourth quarter of 2022, according to the Federal Deposit Insurance Corp. The first quarter of this year saw two high-profile bank failures, which forced the Fed to establish an emergency lending facility. And Wall Street is rife with talk of impending chaos among nonbank lenders and alternative-asset managers, should interest rates move much higher.

Erring in either direction—by raising rates too much or not enough—would risk disrupting a fragile financial system and throwing millions of Americans out of work, erasing years of labor-market gains. Even an ideal outcome, cooling the economy without causing a deep recession, probably will lead to some painful fallout, so long as the Fed remains ironclad in its resolve to keep interest rates elevated even as joblessness rises, growth sputters, and a public backlash ensues.

“They’re walking a tightrope without a net,” Swonk says.

And Wall Street is rife with talk of impending chaos among nonbank lenders and alternative-asset managers, should interest rates move much higher.

 

 

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