As Fed Chairman Jerome Powell acknowledged on Wednesday, the latest rate hike is sure to slow the economy.
Never underestimate the stock market’s ability to prioritize hope over experience.
Hope would suggest that everything will work out fine: The banking panic that began with Silicon Valley Bank’s collapse is just a blip; the Federal Reserve’s quarter-point interest-rate hike, despite the turmoil in the financial system, is sound monetary policy; and the
S&P 500 index’s
bounce that began in October really was the start of a new bull market. That the index rose 1.4% this past week, while the
Cboe Volatility Index,
better known as the VIX, fell 15%, would suggest the problems are manageable.
Experience suggests otherwise. Banking panics aren’t something to be trifled with. As Fed Chairman Jerome Powell acknowledged on Wednesday, the latest one is sure to slow the economy. He suggested that it was the equivalent of a rate hike, though some have put it at a half-point or even 1.5 percentage points. Knowing that, Powell still raised rates by a quarter-point, something that is likely to exacerbate problems in the financial system. “The Fed is making a mistake,” writes Andrew Brenner of NatAlliance Securities.
The problem, however, isn’t the possibility of more bank failures. It’s that banks are likely to curtail lending—lending they had already started to limit. Even before the failure of SVB, the Fed’s January Senior Loan Officer Opinion Survey showed that the percentage of banks tightening lending standards had risen to 44.8%, the highest reading since July 2020, at the…