Banking Woes Increase Pressure On Fed As Hike Looms

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by Tyler Durden
Wednesday, May 03, 2023 - 03:25 PM

By Garfield Reynolds, Bloomberg Markets Live reporter and strategist

The US banking system is still struggling with the impact of the Federal Reserve’s 4.75 percentage points of interest-rate hikes, even as the central bank is set to add another quarter point today.

The resolution of First Republic Bank’s woes was supposed to relieve matters, but regional lenders promptly sank on concerns others will need rescuing. This looks to be a slow-moving car crash — monetary policy famously acts with a lag. It is also a bit counter-intuitive, because traditionally the expectation is that higher rates improve bank profits by allowing them to increase the gap between their cost of capital and the interest they charge.

This time round, things are a bit different. There’s the persistent yield curve inversion that works against those who borrow short-term and lend longer-term, and the Fed’s helped make money-market rates high enough to lure depositors away. Then there’s the unintended consequences of post-2008 regulations that mandated lenders to hold larger amounts of Treasuries, assets that are now worth a lot less after Fed rate increases.

All that underscores the potential that the banking woes, and their own slow-moving impacts on broader credit conditions, will push policymakers to halt hikes sooner than they have been signaling.