Bank stress is bringing the economy closer to a recession, the Minneapolis Fed’s Kashkari said
Mario Tama
The recent tensions in the banking system that led to the collapse of Silicon Valley Bank and Signature Bank will take time to clear up, said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis during an interview on CBS’s Face the Nation on Sunday. Those tensions will also push the US economy closer to a recession, he added.
“We know there are other banks that have long-dated government bond exposures that have what we call duration risk on their books,” he said. “We also know that there is a lot of commercial real estate investment in the banking sector and there are some losses that are likely to work their way through the banking sector. So it will take some time before this process becomes fully clear.”
Still, he pointed out that the banking system has plenty of capital to withstand this pressure.
The recent stress in the banking sector “definitely brings us closer to recession,” he said. “What’s unclear to us is how much of this banking stress leads to a widespread credit crunch.” That credit crunch would then slow down the economy.
On the positive side, “these stresses could then lower inflation, so we have less to do with interest rates to balance the economy,” Kashkari said. “It’s something to watch very closely and that’s what we’re focusing on.”
He is encouraged that “deposit outflows have slowed. Some confidence is being restored in smaller and regional banks.”
But at the same time, the capital markets have been largely closed over the past two weeks. If these capital markets remain closed because borrowers and lenders remain nervous…that tells me it’s going to have a bigger impact on the economy,” he said.
Although bank stress could slow the economy, “it’s too early to make any predictions about the next rate meeting,” Kashkari said. “We will continue to be guided by the data and evidence.”
He sees the need to make US banking regulations fairer for regional and community banks.
“We need regional banks in America. We need community banks in America,” he said. “Once we get through this period of stress, we need to develop a regulatory framework that both ensures the soundness of our banking system and is fair and balanced so that community and regional banks can thrive. We don’t have that today.”
On Friday, UBS analysts said the Fed’s balance sheet implied liquidity stress is stabilizing.
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