“It definitely brings us closer,” Kashkari said. “What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch. That credit crunch … would then slow down the economy. This is something we are monitoring very, very closely.”
Kashkari, who has been among the most hawkish Fed policymakers in advocating higher interest rates to fight inflation, said it remained too soon to gauge the size of the “imprint” bank stress will have on the economy, and therefore too soon to know how it might influence the next interest rate decision of the Federal Open Market Committee.
The Fed raised interest rates a quarter of a point this week but opened the door to pause further increases until it is clear how bank lending practices may change following the recent collapse of the Silicon Valley Bank and New York-based Signature Bank.
“Right now the stresses are only a couple of weeks old,” Kashkari said. “There are some concerning signs. On the positive side is deposit outflows seem to have slowed down. Some confidence is being restored among smaller and regional banks.”
“At the same time,” he continued, “we’ve seen that capital markets have largely been closed for the past two weeks. If those capital markets remain closed because borrowers and lenders remain nervous, then that would tell me, okay, this is probably going to have a bigger impact on the economy. So it’s too soon to make any forecasts about the next FOMC meeting.”
The Fed has rolled out an emergency lending program meant to keep other regional lenders from trouble should deposit withdrawals increase. Recent data showed money moving from smaller to larger banks in the days following SVB’s March 10 collapse, though Fed chair Jerome Powell said last week he thought the situation had “stabilized.”
Congress this week holds its first hearings on the SVB failure, which has sparked calls for tighter supervision of mid-sized banks, prompted the Fed to launch its own internal review of bank supervision, and led to calls for a broadening of the federal government’s deposit insurance program.
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