Economists had hopes that the Federal Reserve could achieve a soft landing as it worked to tame inflation, but that prospect could be harder in light of the liquidity crunch facing the U.S. banking industry.
While liquidity pressures have increased in recent quarters, severe strains emerged at a few institutions the week of March 6, culminating with the failures of Silicon Valley Bank on Friday, March 10 and Signature Bank on Sunday, March 12. Those two closures marked the second and third-largest U.S. bank failures ever.
Still, bankers and advisers have noted that the issues at those two institutions were unique given their high concentrations of uninsured deposits and exposure to the technology and cryptocurrency sectors. The Fed has also unveiled an emergency lending program aimed at shoring up liquidity across the banking industry and institutions tapping the program and the central bank's discount for billions in financing in the first week. And a group of 11 banks made a total uninsured deposit of $30 billion into First Republic Bank to shore its liquidity, with the effort led by Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co., which each made a $5 billion uninsured deposit into the beleaguered institution.
Those dynamics could give the Fed enough cover to move forward with planned rate hikes. In interviews with S&P Global Market Intelligence, investors, analysts and economists say that the Fed remains laser-focused on reducing inflation and the latest jobs report and consumer price index reading provide further support for additional tightening.
Those interviews were highlighted in a recent series of articles examining the prospect of a recession and whether traditional market indicators such as an inverted yield curve remain accurate in the current cycle. The series also highlights how consumers and corporates are reacting to elevated inflation and rising interest rates and the rocky road ahead as the U.S. government is likely to push negotiations to raise the debt ceiling and avoid a default down to the eleventh hour. The key takeaways from the series and recent developments in the liquidity crunch facing U.S. banks are featured in the latest Street Talk podcast recorded on March 13.
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"Street Talk" is a podcast hosted by S&P Global Market Intelligence.
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