US banking system turmoil won’t prevent a Fed rate hike

The failure of two US banks caught financial markets by surprise but we believe the macroeconomic implications are minor and will not be making any major changes to our baseline forecast. For now, stress is contained mostly in regional banks. We still expect the Fed to hike by 25bps at the upcoming March meeting. With inflation continuing to run well above the 2% target, a pause in the tightening cycle or a rate cut would be premature. Policymakers can use tools other than interest rates to alleviate pressures in the banking system.

What you will learn:

• We don’t believe that recent bank failures pose systemic risk to broad financial system and economy. However, the crisis isn’t over and there is a high degree of uncertainty in our assessment. Areas of concern are the lower-rated areas of the high-yield corporate bond market, commercial real-estate, and the leverage loan market. We will monitor loan growth, delinquencies and charge off rates, banks’ financial performance and usage of the Fed’s discount window to assess potential risks to the economy.
• This may not be the last point of stress in the economy as the Fed continues to raise rates. Monetary policy impacts the economy with a lag and we also anticipate rate increases in May and June. The Fed’s policy tightening risks exposing more fissures in the economy and financial system.