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Regional banks are reeling as rate hikes squeeze their business model
All eyes will be on Fed Chair Jerome Powell for clues to where the central bank is leaning beyond today’s decision.
Photographer: Samuel Corum/BloombergLisa Abramowicz
Wall Street is trembling as the Fed heads toward its 10th rate increase in a row later today.
The Fed is broadly expected to hike by 25 basis points, but as all of today's Surveillance guests noted, the strains on the banking system are troubling. There’s a pretty straight line between the Fed’s rate cycle and regional lenders’ woes, Whether you describe those risks as a crisis or merely idiosyncratic.
“The overall level of stress in the banking system is high,” Bank of America’s Mark Cabana said. “This is a byproduct of tight monetary policy. This is the byproduct of a Fed that is setting policy at a restrictive level.”
(Watch your inbox later today for a bonus newsletter after our Surveillance special on the Fed decision. We’ll be back on air at 1:30 p.m. New York time
State Street’s Lee Ferridge said the Fed is faced with the devil it knows (inflation) and the one that it can’t be certain about (how bad regional banks’ troubles may get). Meanwhile, investors are increasingly attuned to the idea that more bad news is in the wings after yesterday’s big dive for small banks.
“For sure the market is biased to the gloom,” he said. “Every story about the gloom gets a bigger reaction than any story about positivity.”
Some commentators, including former Dallas Fed President Robert Kaplan, have said regional lenders’ pain is just getting started, with an even more troubling crunch yet to kick in. Wedbush Securities’ David Chiaverini made the case today that the Fed might need to pivot to rate cuts if banks’ struggles become a full-blown crisis.
But JPMorgan’s Bruce Kasman said it’s too early for the Fed to consider backing off its inflation-crushing zeal.
