The Federal Reserve should not raise interest rates on March 22
The United States has a stubborn inflation problem. Food, rent and transportation costs remain high, and many parts of the service economy aren’t cooling off. It’s worrisome. But there’s a larger concern right now: the stability of the financial system. The rapid downfalls of Silicon Valley Bank and Signature Bank have zapped confidence in critical parts of the banking sector and triggered concerns about what is next to rupture. The Federal Reserve should temporarily pause interest rate hikes on Wednesday to give the financial system time to adjust to the new reality.
Bank failures are scary. This is not a repeat of the 2008-2009 financial crisis. But people are shaken. Many are moving money out of small and midsize banks and into larger ones. It’s getting harder to get a loan as banks have little appetite for additional risk. Regional banks remain under pressure. First Republic Bank needed a $30 billion cash infusion. Overall, banks have borrowed $308 billion from the Fed, up from $5 billion a week ago. A crisis abroad at Credit Suisse only adds more jitters. As the Wall Street saying goes, “When the Fed tightens, something breaks.” The nation needs certainty that nothing else is at a breaking point.
This doesn’t mean rate hikes are over. In fact, the Fed should signal in its forecasts and in Chair Jerome H. Powell’s Wednesday news conference that more rate increases are coming, including at the next meeting on May 3. Investors still expect more hikes. But the Fed’s ultimate job is risk management, and right now the bigger risk is further harming financial stability.
Almost 190 banks are at risk of a similar Silicon Valley Bank-style crisis if customers attempt to withdraw deposits, several academics warn in new research. These institutions are sitting on too many government bonds that are worth less after the rapid rise in interest rates. In other words, many banks don’t have enough money to cover a small-scale bank run.
While inflation remains well above the Fed’s 2 percent goal and the job market is still strong, that data is a snapshot of reality as of February. There has been a dramatic shift in just over a week. The banking stress is likely to cause the tech sector to pull back even more. Regional banks are a big driver of commercial real estate. Construction job openings were already falling fast in January, and this crisis could accelerate the retreat. The full extent of the fallout in numerous industries isn’t yet clear.
The Fed has developed a reputation for being “data dependent.” Now is the moment for Mr. Powell to wait for clearer data and to use his microphone to assure an anxious nation that banks are safe and the Fed has fixed any troubling supervisory lapses.