When Fed officials meet this week, the suddenly urgent question is whether the level of pressure on the banking industry has become so great it risks a larger financial crisis
At an early January meeting of the Virginia Bankers Association, executives were already nervous that Federal Reserve interest rate increases were making it hard to compete for deposits.
After the announcement Treasury Secretary Janet Yellen and Fed Chair Jerome Powell issued their second Sunday afternoon statement of reassurance in as many weeks, saying as Asian markets prepared to open for the week that “the capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient.”
Fed officials gather this week having agreed bank stress poses a “systemic risk” to the economy, and “in any other hiking cycle this … would end the tightening process and perhaps send it into reverse,” said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments. “The difference today is the Fed’s focus on inflation.”
To many officials, the fact that inflation has been slow to respond to higher rates, while the economy has continued to grow and spin out hundreds of thousands of new jobs a month, was evidence rates needed to move higher still. Because nothing had “broken” in the economy, further rate increases were seen as cost-free.
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