Aseries of banking crises this month headlined by the failure of Silicon Valley Bank has forced analysts from multiple banks including JPMorgan Chase to rewrite their recession forecasts from scratch, as months of small victories against inflation and a relatively strong economy were potentially swept away in under two weeks.
Even if the government and the private sector are able to successfully contain contagion from the bank collapses spreading through the economy, the failures may still lead to lasting damage for the U.S. financial system. Some banks are teetering on the edge in Europe and the U.S., while jittery markets and the promise of stricter regulation could still lead to a credit crunch—a steep decline in banks’ willingness to lend caused by a lack of funds.
It adds up to an impossible choice the Federal Reserve has to make when officials meet on Wednesday: Slow down the pace of interest rate hikes or plow ahead to bring down resurgent inflation and risk amplifying damage to the economy. But as far as the Fed is concerned, hopes of engineering a soft landing for the economy and avoiding a recession may already be in the rearview mirror.
“The Fed is facing a difficult task on Wednesday, but it is likely already past the point of no return,” JPMorgan strategists led by Marko Kolanovic, the bank’s chief global markets strategist, wrote in a note to clients Monday. “A soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending).”
Fed hikes rates despite concerns over banking crisis….
The Federal Reserve hiked interest rates by 0.25 percentage points on Wednesday after numerous failures in the banking sector had prompted some analysts on Wall Street to call for a pause.
The quarter-point hike is the ninth consecutive rate increase by the Fed since March of last year as part of the U.S. central bank’s program of quantitative tightening undertaken in response to high inflation. The Fed’s baseline interest rate range is now set to 4.75 to 5 percent.
The move shows that the Fed’s first priority remains bringing down elevated price levels, even as the bank’s rate increases have strained portfolios in the banking sector, triggering some poorly managed banks to collapse.
AC