First, the US Federal Reserve declared inflation to be “temporary”, then it recognized too late that inflation is probably more sustainable – only to then raise interest rates faster than it has been for decades, thereby triggering the banking crisis.
Because one thing is clear and proven: the banking crisis arose because, due to the now attractive interest rates again, many US customers withdrew their money from banks and invested it in money market funds with higher interest rates delay. The banks, in turn, had to sell their portfolios in distress due to the outflow of funds (mostly government bonds, which were making heavy losses) – this ultimately became the undoing of Silicon Vally Bank and Signature Bank.
So there’s a pretty clear connection between rapid interest rate hikes and the banking crisis – even if bad management at Silicon Valley Bank, for example, certainly contributed to the bank’s demise. But at the beginning of the bank crisis there were interest rate hikes by the Fed – it is all the more astonishing that the head of the most important district of the Federal Reserve, John Williams, is now simply denying the connection between rapid interest rate hikes and the banking crisis!
Fed: Williams denies link between rapidly rising interest rates and banking crisis
New York Fed Branch President John Williams dismissed the notion that the central bank’s rapid rate hikes triggered the banking crisis highlighted by the recent bank failures (SVB and Signature Bank). This is now reported by Bloomberg.
“Personally, I don’t think the pace of rate hikes was really the cause of the problems at the two banks in March,” he said Monday during a moderated discussion organized by New York University’s Economics Review. “I think it’s common knowledge that these institutes had some pretty idiosyncratic specific issues.
The collapse of the Silicon Valley bank last month was the second largest in US history. SVB and Signature Bank were taken over by regulators after a run on their deposits.
The US Federal Reserve hiked interest rates by a quarter of a percentage point last month, bringing its benchmark interest rate to a target range of 4.75% to 5% after it was close to zero a year earlier.
The central bankers are now trying to assess to what extent the latest banking crisis could lead to a credit shortage, which could slow down the economy.
“We’ve seen in the past that credit conditions can tighten a bit,” Williams said, noting that that could affect spending and employment. “We don’t really know if that will be the case this time. We haven’t seen any clear signs of tightening credit conditions yet and we don’t know how big the impact will be.
That’s an astounding statement from Fed member Williams, given that data released by the Fed itself on Friday shows that US bank lending has fallen the sharpest since the data was first recorded. So Williams not only denies the verifiable connection between the banking crisis and high interest rates – in order to then deny the lending data published by the Fed itself. That’s tough stuff and will further damage the Fed’s credibility, which is already weakened!
Banking crisis: consumers are finding it increasingly difficult to obtain credit
A report published by the New York Fed on Monday also shows how severe the credit crunch has become: US consumers are becoming more pessimistic about their ability to obtain credit. The proportion of US households who say it is harder to get credit rose last month to its highest level in nearly 10 years since the survey began.
The Fed quickly hiked interest rates to curb high inflation. Last month’s forecasts by central bankers showed that the 18 central bankers expected interest rates to hit 5.1% by the end of the year, the median of their forecast. That means a further increase by a quarter point. Investors are betting that the Fed will make the move at its next meeting on May 2-3, but will cut interest rates later this year – something Fed bankers don’t expect, according to their own forecasts.
But Williams downplayed the importance of market expectations for policymakers:
“In the end, I’m not too worried about the market expectations going far into the future because there might be different views on how the economy is going to turn out,” he said. “Ultimately we have to make the choices we think are right to achieve our goals of maximum employment and price stability.”
FMW/Bloomberg
