The turmoil triggered by the recent failures of Silicon Valley and Signature banks and, more importantly, the specter that more regional/community banks would either endure the same fate or, at a minimum, reduce credit extension to shore up their balance sheets has led many market participants to predict a pause by the FOMC at this week’s highly anticipated meeting. After all, some said, the rapidity of Federal Funds rate increases during the past year was a key driver in depressing asset values and, by extension, the SVB and SBNY closures, implying that more monetary policy tightening would hasten a broader contraction in traditional bank lending, which would trigger a recession and hobble inflation along the way, obviating the need for additional rate hikes. According to a recent study by Goldman Sachs, regional and community banks (up to $250 billion in assets) extend as much as 50% of all consumer and industrial loans in the United States, and, as a consequence, any meaningful pull back by these institutions would surely slow economic activity and increase unemployment, conditions that would favor not only a pause, but ultimately rate cuts prior to the end of 2023.
Comments are closed.