The failures of Silicon Valley Bank and Signature Bank are likely to weigh on the Federal Reserve’s plans for raising interest rates this month and throughout 2023, according to economists.
Just last week, Federal Reserve chairman Jerome Powell told members of the Senate Banking, Housing and Urban Affairs Committee that interest rates could move higher than widely expected by policymakers as the central bank sought to battle stubbornly high inflation.
However, as the liquidity problems that hit both Signature Bank and Silicon Valley Bank were at least in part caused by sharply higher costs linked to higher interest rates, some experts now believe that the Fed may have to adjust its plans.
Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman, explained that the shock of the past week would likely lead to “less lending and more capital preservation by banks”.
“The Fed is looking at a rapidly changed backdrop in which expectations for growth and inflation should be coming down,” he said. “We have been expecting the Fed’s hiking cycle to end this spring as inflation plateaus, and the events of the last few days reinforce that view.”
Both Signature Bank and Silicon Valley Bank saw their liquid saleable assets — mostly US Treasury securities — fall in price at the same time as customers sought to withdraw huge amounts of cash from depository accounts, as the Bank Policy Institute explained in an initial analysis of the events published on Monday.
In an analyst note looking ahead to the March 22 meeting of the rate-setting Federal Open Markets Committee (FOMC), Goldman Sachs chief economist Jan Hatzius said the stress in the US banking system would likely lead to there being no interest rate increase this month.
Barclays also expects no rate rise this month, having previously forecast a 50-basis-point increase, according to The Washington Post. Other bank analysts are forecasting a 25bps increase this month.
Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, agreed that the FOMC would “have to consider financial stability risks in addition to their mandate of bringing inflation back under control”.
Antonucci added that a 25bps increase was likely “given ongoing inflationary pressures and what looks like limited systemic risks to the US banking system at this point”. However, a pause on interest rate hikes was also “entirely possible”.
Aneta Markowska, US economist at Jefferies Group, said a series of 25bps increases was “a prudent path”.
Columbia Threadneedle chief economist Steven Bell added: “A rate hike of [25bps] would be taken as a sign that the Fed think their hiking cycle is close to an end. If the Fed went ahead with a rise of [50bps], which seemed a distinct possibility just a week ago, markets could be seriously rattled. We won’t get any clues from Fed speakers as they are in a blackout period, so it’ll be a nervous wait.”
Meanwhile, the latest CPI figure shows that February’s year-on-year inflation rate was 6%, down slightly from January 2023 and down substantially from the peak of 9.1% in June last year.