Top Fed official warns banking crisis ‘definitely brings us closer’ to a recession

Neel Kashkari, president of the Minneapolis Fed, said the recent banking crisis that led to the closure of Silicon Valley Bank and Signature is “definitely” moving the US closer to recession.

“It definitely brings us closer now,” Kashkari told CBS’s “Face the Nation” on Sunday.

He said the banking crisis could lead to a credit crunch, or a decrease in the amount of money banks have to lend.

What is unclear to us is how much of this banking stress leads to a widespread credit crunch. And then that credit crunch, as you said, would slow down the economy,” he said.

Kashkari said Fed officials are monitoring the impact of the crisis “very, very closely” and it is too early to determine whether it will have any impact on inflation and the next Fed meeting.

Neel Kashkari, president of the Minneapolis Fed, said the recent banking crisis that led to the closure of Silicon Valley Bank and Signature is “definitely” moving the US closer to recession

The Federal Reserve raised its key interest rate by a quarter point on Wednesday to 4.75-5 percent, the highest rate since 2007.

He said the banking crisis could reduce inflation and prevent the Fed from raising rates any further.

“On the one hand, such tensions could lower inflation, so we have to do less work with the federal funds to balance the economy,” he said.

Kashkari did say the banking system has the “full backing” of the Federal Reserve.

“The banking system has strong capital and liquidity and has the full support of the Federal Reserve and other regulators,” he said. “The US banking system is resilient and healthy.”

Kashkari’s words came after the Financial Stability Oversight Council held a closed meeting after data from the Fed showed that customers had withdrawn $100 billion from banks in the week ending March 15.

But Kashkari noted that money movements from smaller banks to larger institutions like JP Morgan have slowed in recent days, which he took as a sign of restored confidence.

“There are some worrying signs, the positive sign is that deposit outflows appear to have slowed. Some confidence is being restored in smaller and regional banks,” he said.

The terrifying banking saga played out over the course of just two weeks and led to the downfall of now four major banks: Silvergate, Silicon Valley Bank, Signature and, most recently, major global lender Credit Suisse.

Security guards allowed individuals into the headquarters of Silicon Valley Bank in Santa Clara, California, in March

The successive collapses have sent shockwaves across the industry, while causing liquidity problems for other regional banks, such as First Republic, as concerned citizens continue to flock to branches to withdraw money from their accounts.

Experts are now expressing confidence that the banking sector can withstand the shocks – saying recent volatility is misleading – while others have warned they could still trigger global catastrophe.

Shares of San Francisco lenders, as well as dozens of others, have taken a nosedive over the past 10 days, putting pressure on the Fed to halt a series of rate hikes to ensure financial stability.

Other “emergency lines” offered by regulators include a $54 billion buyout of New York-based Suisse by the Swiss government, and a $30 billion bailout for First Republic by a coalition of major banks, including JPMorgan and Goldman Sachs.

Experts have argued that such measures have all but removed any risk of contagion within the banking sector, whose questionable risk management has been cited as one of the main causes of the previous financial crisis.

However, the current crisis comes as banks around the world adjust to a sharp rise in interest rates to cope with the marked economic inflation since the COVID-19 pandemic.

Accustomed to years of borrowing cheaply thanks to the ultra-low interest rates charged by central banks around the world, lenders like SVB and Credit Suisse have struggled to manage their portfolios.

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