The recent closure of three banks, including the second-biggest bank failure in US history, has created a sense of uncertainty for the Federal Reserve's (Fed) plan to quicken the pace of interest rate increases. While the central bank signaled more rate hikes later this month, the collapse of Silicon Valley Bank (SVB), Signature Bank, and Silvergate has brought up questions about the Fed's next move.
The collapse of SVB, in particular, was due to various factors that were exacerbated by the rising interest rates meant to constrain the economy and reduce inflation. The startups, which make up a vast portion of SVB's customer base, were burning through cash, and the bank's response to a fire sale of bonds in its portfolio was less effective in reducing deposit withdrawals as bond prices fell due to rising rates.
The response by regulators was to ensure depositors of SVB and Signature Bank would have full access to their money, while a new emergency lending facility would ensure the protection of deposits across the regulated US banking landscape. However, economists and analysts are uncertain if the Fed will follow through with additional rate hikes later this month after promising more.
Economists suggest pause on rate hikes at upcoming Fed meeting
Some economists suggest that the Fed could pause interest rate hikes at the March 22 meeting, with a focus on observing what's going on in the financial markets and the fallout of SVB. Goldman Sachs experts have tweaked their projections, no longer estimating the Fed to lift rates on March 22 due to the ongoing worries in the financial industry, but still expecting rate increases come May, June and July. This change has caused a remarkable amount of apprehension with regards to the Central Bank's programs for expediting interest levels.
The closure of these three banks has created considerable uncertainty for the Fed's plan to quicken the pace of interest rate increases. Future rate increases may not be as sharp as last year, given the warning that things can break when rates move up sharply. Some economists suggest that policymakers should move more gradually on tightening interest rates from here.
In conclusion, the collapse of three banks has brought up questions about the Fed's interest rate hike plan.It is still up in the air as to whether or not the Fed will increase rates, yet analysts recommend that decision-makers take a slower way of raising them to stop any economic instability. The authorities' actions to guarantee depositors unrestricted access to their money is commendable, and how the financial environment responds to this banking sector strain remains unknown.
A summary of the state of the US market as of Tuesday
On Tuesday, the Dow Jones Industrial Average, a stock market index that measures the performance of 30 large publicly traded companies in the United States, closed more than 300 points higher, ending a five-day losing streak. This was due to a rebound in the shares of regional banks such as First Republic, PacWest, and Charles Schwab, which saw significant gains during the day. However, the SPDR S&P Regional Banking ETF only rose by 2% as other regional banks struggled to hold onto their gains. The volatile nature of the market was evident in Zions Bancorp. and Western Alliance, which initially rose before turning negative in the afternoon, and then finished the day with gains of 4% and 14%, respectively.
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