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What is the length and severity of the banking crisis? Even Fed officials themselves don't know the answer to that…

Jamie Cameron
10. 4. 2023
3 min read

The Fed has shown that it is oblivious to the damage it will do in its campaign to reduce inflation. The collapse of several banks is proof of that. But now it appears that they are not so sure and do not know for sure whether their actions will bring more problems and casualties.

Fed officials themselves do not know how long the banking crisis will last

New York Fed President John Williams said Friday that inflation remains a major concern and that he is closely monitoring credit conditions in the wake of the banking crisis that caused three U.S. banks to fail this month.

Reducing inflation remains the Fed's main goal. Source:

"Tensions in some parts of the banking system are likely to lead to tighter credit conditions, which in turn will reduce spending by businesses and households," Williams said. "The extent and duration of these effects, however, is still uncertain."

Data on inflation and the labor market in the first two months of the year led the Fed to raise rates by a quarter percentage point last week, despite bank failures that sent shockwaves through the financial sector and markets. The Fed thus showed that it is not afraid to go overboard in its efforts. Williams said he expects inflation to fall to around 3.25% this year and to be closer to the Fed's target over the next two years.

Banking crisis

The Federal Deposit Insurance Corporation (FDIC) took control of SVB on March 10. This was the biggest banking collapse in America since the 2008 failure of Washington Mutual. The wheels had started turning 48 hours earlier when the bank suffered a multi-billion dollar loss monetizing US Treasury bonds to raise money to pay depositors. It tried - unsuccessfully - to sell shares to shore up its finances. This triggered the panic that led to its downfall. And this is where it all began. The Fed added fuel to the fire with another rate hike, showing that it was not taking the collapsing banks into account.

https://www.youtube.com/watch?v=OU72wcPyUfM

Wall Street has been debating for months whether the economy is headed for a recession, and many economists have been expecting it to happen in the second half of this year.

However, the rapid moves in the markets following the failure of regional banks in the US have caused some strategists to now expect the economic downturn to come sooner. Economists are also cutting their growth forecasts on the assumption that bank lending will ease.

A very rough estimate is that slower loan growth by mid-sized banks could reduce the level of GDP by half to a full percentage point over the next year or two, JPMorgan economists wrote on Wednesday. "We believe this is broadly consistent with our view that tighter monetary policy will plunge the U.S. into recession later this year."

What do you think? Has the Fed's sinking of the banking sector hastened the arrival of a recession?

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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