A fall in SVB would slow down interest rate growth

While until a few days ago it was a question of whether the Federal Reserve (Fed) would raise rates by a quarter point or a half point, a figure that would fluctuate depending on data such as inflation or unemployment, the fall of the Silicon Valley bank changed the landscape and could cause regulators to stall.

This is the opinion of various experts consulted, who believe that what happened will force the Fed to be less aggressive and even consider pausing hikes until markets stabilize.

According to University of California economics professor Eric Swanson, before the bank crash, “the only debate was whether the Fed would raise rates 0.25 or 0.5%, and most people expected 0.5%,” but now “with the collapse SVB and the resulting pressure on regional banks, there is no chance that the Fed will raise half a point”.

Most likely, he explains, the Fed will continue to raise rates by 0.25%, although there is a possibility that they “may even hold off on raising interest rates for a meeting or two just to calm the financial system.”

What he is sure of is that on March 21 and 22, when the Fed’s Open Market Committee meets, the crisis caused by the bank collapse will “absolutely dominate the discussion.”

California-based SVB announced last Wednesday that it is seeking a capital increase to try to deal with financial difficulties, a situation that has caused many clients to withdraw their funds.

Subsequently, regulators had to shut down the bank on Friday due to a lack of liquidity, an event that sent the company’s stock price crashing and wreaked havoc on the banking system in the United States and elsewhere.

The Treasury Department, the Fed and the Federal Deposit Insurance Corporation (FDIC) announced Sunday that customers would have access to their money on deposit with SVB starting Monday and promised a similar plan for Signature Bank, which was also closed under the same parameters.

Despite the fact that the President of the United States of America, Joe Biden, wanted to calm the markets and assured this Monday that the country’s banking system was “safe”, stock markets around the world recorded sharp falls because of what happened.

On March 22, the Fed will announce its decision. If rates rise, it will be the ninth consecutive increase in the past year in a series of increases implemented to curb inflation.

The last one, published in February, amounted to a quarter of a point and with it interest rates ranged from 4.5% to 4.75%, which is the highest figure since September 2007.

It was a smaller increase than previous ones, something that hinted that the Fed would start to ease off the gas pedal. But in his semiannual appearance before the Senate and House banking committees last week, Fed Chairman Jerome Powell hinted at possible stronger hikes.

Despite this, he pointed out, the decision has not been made and it will depend on what the data such as unemployment for February published last Friday or inflation that will be published tomorrow will refer to. The banking crisis was not on the table.

For investment banking and securities group Goldman Sachs – which before the crisis predicted growth of 25 basis points – no more rate increases are expected “in light of the tensions in the banking system”, economist Jan Hatzius said in a note published Sunday.

An opinion shared by economist Ken Kuttner, a professor at Williams College: “Before the collapse, there was a certain increase of a quarter of a percentage point, with some probability of half. Now they are likely to leave the rate unchanged, although a quarter of a percentage point is not out of the question,” he added. to EFE.

For his part, analyst Edward Moya of Oanda agrees that “the collapse of the Silicon Valley bank leads to the belief that financial instability will lead to less accommodation by the Federal Reserve.”

“Wall Street has gone from discussing an increase of 25 or 50 basis points to now thinking that the Fed may have ended the increase or may announce one or two smaller increases,” he told EFE.

Still, in his view, “financial regulators have already done enough to ease concerns about financial instability,” so the Fed’s main driver “should continue to contain inflation” and should “keep pace with a 25 basis point rate hike until inflation decreases significantly”.