it turns out Federal Reserve He was Moves fast and breaks thingsbut few people even noticed Collapses to Silicon Valley Bank.
Over the past year, the Fed has been raising interest rates at a rapid and aggressive clip in an effort to tame it High inflation in the United States of America. A common saying on Wall Street is that the Fed increases interest rates until something breaks. Until last week, the question was what, if anything, would be asked. The interest rate increases Generally it takes some time To make their way through the economy, however some people They were kind of scratching their heads at the time this lag appeared. The labor market, which interest rate increases are meant to calm, has stayed strong. economy in general Surprisingly decent shape. Sure, things looked a little ugly encryption And Techniquebut perhaps the problem will be contained there.
Now, the landscape looks very different, and we know what the Fed broke: Silicon Valley Bank, or SVB. (Disclosure: Vox Media, which owns Vox, did business with SVB before it closed.)
It will be a long time before we fully understand what exactly happened in the rapid and dizzying decline of SVB, but there is no doubt that the rise in interest rates was a contributor. They also likely played a role in the demise of Silvergate and Signature Bank, both of which closed in March.
“It’s always a surprise. We didn’t know what could break, obviously this was it,” said Alexander Yocum, an analyst at CFRA Research who covers banking. underwater a lot.”
If interest rates continue to rise rapidly, it could cause more problems for more banks. This has put the Fed in a bind – it wants to tame inflation, which is still highand you want too Ensure financial stability. Both fronts look very difficult.
“We don’t know what risks are lurking around and which institutions are less sound than we thought, especially if rates continue to rise,” said Morgan Ricks, a professor of banking and finance at Vanderbilt University. “We have seen print inflation [for February] It was a bit higher than expected, and the Fed could end up between a rock and a hard place here.”
The script is also a stark reminder What’s on the line In the Fed’s efforts to combat high prices and potential interest rate increases should hurt the economy.
“The Fed has wanted to do things so that something breaks, and that something breaks. The next thing that breaks is two million people will lose their jobs when the unemployment rate goes up,” said Mike Konzal, director of macroeconomic analysis at the Roosevelt Institute.
It could be an increase in interest rates a A solid deal for the banks because they are Let them take more loans And make more money, but as can be seen from the SVB, there are risks for them too.
SVB’s downfall was it The result of the bank’s operation After the signs of problems in the bank began to appear in the second week of March. The bank — which in the SVB case caters largely to technology, startups and venture capital — takes deposits from customers and invests them in generally safe securities, such as bonds. As did the Federal Reserve Increase interest ratesThese bonds have become less valuable. This wouldn’t normally be a problem – the SVB would wait for those bonds to mature. But as investment capital and technology more broadly slowed down, in part because there was less free and cheap money, deposit flows slowed, and customers began withdrawing their money. It became clear that SVB was in the midst of a cash crisis, which caused panic and eventually led to the collapse of the bank.
The concern is that interest rate increases could pose threats to other banks as well. The higher the interest rates, the more banks can start to be a problem.
said Josh Lipsky, senior director of the Center for Geoeconomics at the Atlantic Council. “I think we can say with confidence that these interest rates are showing their teeth in the economy.”
SVB certainly has other characteristics. It catered to a homogeneous clientele, which meant it was highly exposed to one industry, and if that industry falters, so will it. like that Holds a large amount of uninsured deposits. Silvergate f Signaturewhich also crashed, plunged into cryptocurrency, which was also struggling.
Megan Green, chief global economist at Kroll, said the unique nature of these banks is worth examining, especially in light of the suggestion that this is all a result of the Fed tightening monetary conditions more than necessary. “I would be more sympathetic to this argument if Silicon Valley and Silvergate weren’t so private,” she said. As central banks change conditions, “we will hit more pockets of dislocation.” The SVB did some real miscalculations about the potential impact of increasing the inflation rate, too. “Uniquely, SVB has never hedged interest rate risk, which is pretty amazing,” Green said.
However, the SVB is not a complete exception, and interest rate increases pose threats to other banks as well, especially if the Fed continues to aggressively engage with them. “When interest rates go up, it pushes down bond prices, and any institutions that fall on the wrong side of that can find themselves in a less sound financial position than we might like,” Ricks said.
These interest rate hikes could be a problem for the banks which is now a problem for the Fed, because it doesn’t want to break the banking sector. Before the collapse of SVB, Expect many investors The central bank to keep pace with interest rate increases when policymakers meet on March 21-22. As the Wall Street Journal notesLast week, people were talking about whether the Fed would raise interest rates by a quarter of a percentage point, as they did in February, or by half a percentage point, as in December. Now, that has changed – Many investors, analysts and experts believe They will slow down or even stop it altogether.
“They certainly should, in part because they’ve done a lot of tightening already,” Konzal said. He added that economic activity could calm down a bit on its own anyway “because everyone is freaked out and a little freaked out” by the SVB.
“Now, they are in a position where they can go hiking [half a percentage point] John Fagan, former director of the Markets Group at the Treasury Department, said at the following meeting, Politico.
It’s a difficult situation. economic inflation It seems to fall offBut it remains high. Consumer price index by 6 percent During the past year in February.
Gustavo Schwenkler, assistant professor of finance at Santa Clara University’s Levy School of Business, said he doesn’t think the Fed’s overall goals of lowering inflation and cooling the economy have changed in light of the SVB’s collapse. “The goals they have now are much bigger than making sure the tech sector is OK,” he said, “but I certainly think they’re very concerned about how investors will react to any steps they take.” “We may hear different ways of communicating from the Fed about the next actions it will take…to assuage any uncertainty around this.”
On Sunday, after the FDIC, the Treasury Department, and the Federal Reserve announced that they would make sure of everything Depositors’ funds from SVB and Signature Banks It will be guaranteed. The Fed also said it would open a facility for Availability of financing To other financial institutions in the form of one-year loans. The goal is to try to limit contagion across the banking sector and stave off other bank runs, like what happened with SVB. It is an attempt by the Fed to boost confidence so that people do not panic. Green asserted that the Fed could raise interest rates and open a new facility at the same time. “I don’t think that will change the course of the Fed rate at all,” she said.
Beyond the ins and outs of what higher interest rates mean for the few regional banks that may or may not be in trouble, the SVB’s rapid collapse points to a bigger problem: The Fed’s actions will have a lot of ripple effects across the economy, some of which can cause A lot of damage and it can take people by surprise.
“Everyone was wondering when something was going to break in the Fed’s rate hike cycle, and this was the first,” Konzal said. “This is only the beginning if they want to keep walking at the rate they’ve been climbing.”
Conventional economic wisdom is that fighting inflation requires raising interest rates to slow the economy which is eventually driving People are losing their jobs. The Fed has been quite open minded Find a high unemployment rate. A person being laid off or fired may not make headlines as much as a bank collapse, but it is still disastrous for individual lives and, if it happens on a larger scale, for the economy. Once layoffs begin, they are also hard to stop, and the Federal Reserve cannot step in to boost workers as it must boost banks.
The horizon isn’t all bleak. The economy could still have a soft landing without being pushed into a recession, and the job market could still slow without millions of people being thrown out of work. The SVB crisis may also prompt banks to tighten lending conditions and standards, which means the Fed may decide to raise interest rates lower than it thinks to achieve its inflation-lowering targets, Donald Kuhn, former vice chairman of the Federal Reserve, said in an email. .
but for months, I sensed something terrible might be lurking around the corner in the economy, even if no one could put their finger on what. The fall of the SVB is a reminder of how fast the tides turn, and how unpredictable they can be. In fighting inflation, that may not be the only thing the Fed breaks.
“It is in the nature of financial events to unfold quickly,” said Ricks. “No one can tell you with any certainty, and no one can tell anyone with any certainty, that there is no other shoe to drop here.”
