At the start of the week, Fed Chair Jerome Powell made clear that the Fed would continue rate hikes as year over year inflation, although down from its 9.1% peak remained stubbornly high at 6%. This is 4% above the Fed's target of 2%. The odds of a 50 basis point hike in the federal funds rate target seemed likely at the fed's next policy meeting. However, the collapse of SVB, the biggest bank failure in the U.S. since the 2008 financial crisis and concern about contagion to other banks, has raised the question of whether the Fed will revise its future rate increases downward in coming months in 2023. It also raises the question of whether a Recession in 2023 and 2024 has now become more likely.
Undoubtedly.
In a paper I published in 2015 titled " The role of Central Banks in the aftermath of the 2008 financial crisis",
see: https://cirano.qc.ca/fr/sommaires/2015DT-01
I argued that Central Banks policies and, in particular ZIRP ( Zero Interest Rates Policy) was creating the next financial bubble. I also proposed that it will be very difficult to bring interest rates back to a more sensible level. If Central banks attempted it, they would burst the bubble and face turmoil as well as political pressure.
This time has come as the Fed tries to battle inflation.
However, it is easy to see that the threat of inflation, although real, is much less threatening than a banking system collapse.
I would predict that the Fed will reverse, at least temporarely, its policy.
The demise of the Silicon Valley Bank (SVB), known for funding technology start-ups, has sparked concerns that investors will be less keen to risk putting their money into small companies. Ethan Cohen-Cole, chief executive of a clean-technology start-up, says that the situation after the collapse was “absolutely terrifying” and predicts that a lack of investment will inevitably affect small businesses working on climate solutions. But there could be some respite in the form of the US government’s Inflation Reduction Act, which incentivizes investment in green technology...
On 12 March, the US government announced that it would guarantee deposits with the bank, reassuring its former customers...
https://www.nature.com/articles/d41586-023-00778-8
Thank you, Ljubomir for your helpful contribution to this discussion.
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