But pressure is mounting on the Fed to make a decision.Ī group of senior House and Senate Democrats on Monday called on Powell to pause interest rate hikes due to the potential economic fallout. It remains unclear if policymakers believe the economy and inflation are resilient enough that they will need to adjust borrowing costs more to cool things down, as Powell opted to leave the Fed’s options open instead of declaring a timeline for pausing the rate increases. Instead, they do interest rate management by matching the maturity of their deposits with the maturity of their short-term assets-but that can be arduous as customers lose confidence and withdraw their money.
For example, smaller banks do not have access to certain types of derivatives or trading desks that can hedge against interest rate risks. “The reality is that there’s a mounting level of stress on most midsize or small banks, which is almost intolerable because they don’t have the same tools as the big Wall Street banks to hedge their risk exposure,” Bethune says. Service price increases have shown little sign of slowing, sparking concerns among analysts that the Fed won’t be able to claw back price increases to their goal. But the banking challenges have put the Fed in an increasingly difficult position. To some degree, the Fed wants that scenario to play out, because less borrowing and spending could help ease inflation. “Some small and midsize banks have suffered large withdrawals of deposits due to a loss of consumer confidence… but in the case of banks who managed their assets along the lines of Silicon Valley Bank, they will be vulnerable and looking for ways to manage risk and be more conservative in their lending,” says Jim Granato, dean of the University of Houston’s School of Public Affairs, who researches monetary policy. Smaller banks, Powell said on Wednesday, have been tightening lending standards since late last year as a result of the Fed’s ongoing interest rate hikes. They say the previous bank collapses were all outliers and that the problems largely came down to mismanagement at the three banks, where large shares of customers had deposits that surpassed federal insurance limits and were more likely to move their money when it became clear the bank’s investment strategies were backfiring.
But analysts don’t expect these banks and others to collapse à la First Republic, Silicon Valley, and Signature Bank.
regional banks PacWest Bancorp and Western Alliance Bank plunged on Tuesday as the demise of First Republic Bank triggered investor concerns about the financial health of other midsized lenders. “Regional banks serve very important purposes… I think it is healthy to have a range of different kinds of banking doing different things.” “I have personally long felt that having small-, medium- and large-size banks is a great part of our banking system,” Powell said on Wednesday. The fact that the Fed proceeded with a rate hike Wednesday despite serious market turbulence over the string of bank failures reveals the tricky spot Powell finds himself in: He needs to get inflation under control, without cratering midsize banks that are poorly positioned for a high-interest-rate environment. bank to fail in the past two months, had been struggling for weeks and was sold to JPMorgan Chase in a deal announced early Monday morning. Many lenders are facing losses on older securities and loans, which pay relatively low interest rates compared with newer securities. The banking system has been in turmoil since the collapse of Silicon Valley Bank and Signature Bank in early March, in part due to the Fed’s rapid interest rate increases over the past year.
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