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[1/3] The logo of Swiss bank Credit Suisse is seen in front of a branch office in Bern, Switzerland November 29, 2022. REUTERS/Arnd Wiegmann/File PhotoWASHINGTON/FRANKFURT, March 26 (Reuters) - Stress in the banking sector is being closely monitored for its potential to trigger a credit crunch, a U.S. Federal Reserve policymaker said on Sunday, as a European Central Bank official also flagged a possible tightening in lending. "What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch. Meanwhile in Europe, the ECB believes that recent banking sector turmoil may result in lower growth and inflation rates, its vice president Luis de Guindos said. Turbulence among banking stocks on both sides of the Atlantic continued into the end of the week, despite efforts by politicians, central banks and regulators to dispel concerns.

WASHINGTON, March 26 (Reuters) - Recent stress in the banking sector and the possibility of a follow-on credit crunch brings the U.S. closer to recession, Minneapolis Fed president Neel Kashkari said Sunday in comments to CBS show Face the Nation. "It definitely brings us closer," Kashkari said. "What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch. "At the same time," he continued, "we've seen that capital markets have largely been closed for the past two weeks. The Fed has rolled out an emergency lending program meant to keep other regional lenders from trouble should deposit withdrawals increase.

☆ The Fed sees a looming credit crunch. What's that?
▼ + stars: | 2023-03-24 | by ( ) www.reuters.com time to read: +4 min

March 24 (Reuters) - It's an old saw: A credit crunch is when your bank won't lend to you. In other words: a credit crunch is coming. But the credit growth rate has recently fallen below its historic average to a level that has often been associated with a recession. That was indicative of the lasting restraint that episode had on the recovery in credit and economic growth overall. That was the case 8-10 years ago when low oil prices triggered a credit crunch among U.S. oil fracking companies, weighing heavily for a period on overall commercial loan growth while consumer loan growth kept improving.

"It was a quirky situation," St. Louis Fed President James Bullard said in comments to a St. Louis community group. 'FELT VERY STABLE'The Fed raised interest rates by a quarter of a percentage point on Wednesday, its ninth straight increase. This wasn't a straightforward decision," Atlanta Fed President Raphael Bostic said in an interview with National Public Radio, a U.S. media outlet. But "that's a different issue than the macro policy issue that we were dealing with in terms of interest rates," Bostic said. So the conditions were right to do monetary policy the way we want to do monetary policy."

The Fed raised its benchmark overnight interest rate by a quarter of a percentage point on Wednesday, the ninth straight policy meeting that ended with a rise in borrowing costs since the current tightening cycle began in March 2022. "It's really ... a question of not knowing at this point," Powell told reporters after the meeting. This is 12 days ago," that a pair of bank failures reshaped the financial landscape facing the central bank, with potential implications for the real economy and the path of inflation. The U.S. Senate Banking Committee is holding hearings on the bank failures next week. "The challenges facing the (Federal Open Market Committee) today ... take on a particular aura of complexity."

The index of top European banks (.SX7P) was down 1% in early trading, with German banking giants Deutsche Bank (DBKGn.DE) and Commerzbank (CBKG.DE) both falling 0.8%. The rescue of Credit Suisse, which followed the collapses of California-based Silicon Valley Bank (SVB) (SIVB.O) and New York-based Signature Bank (SBNY.O) ignited broader concerns about investors' exposure to a fragile banking sector. The decision to prioritise shareholders over Additional Tier 1 (AT1) bondholders rattled the $275 billion AT1 bond market and some Credit Suisse AT1 bondholders are seeking legal advice. "The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a 'viability event', in particular if extraordinary government support is granted," FINMA said. However, some watchers think the banking system is more vulnerable to rumour and rapid moves in an era of widespread social media use, posing a challenge for regulators trying to tamp down instability.

Fed Chairman Jerome Powell sought to reassure investors about the soundness of the banking system, saying that the management of Silicon Valley Bank "failed badly," but that the bank's collapse did not indicate wider weaknesses in the banking system. "These are not weaknesses that are running broadly through the banking system," he said, adding that the takeover of Credit Suisse seemed to have been a positive outcome. The Federal Open Market Committee policy statement also said the U.S. banking system is "sound and resilient." The much-anticipated rate cut by the Fed, which had delivered eight previous rate hikes in the past year, sought to balance the risk of rampant inflation with the threat of instability in the banking system. The banking sector has been in turmoil after California regulators on March 10 closed Silicon Valley Bank in the largest U.S. bank failure since the 2008 financial crisis.

The Fed's policy-setting committee raised interest rates by another quarter of a percentage point in a unanimous decision on Wednesday, lifting its benchmark overnight interest rate to the 4.75%-5.00% range. Fed officials still feel that "some additional policy firming" may be needed, and they penciled in one more quarter-of-a-percentage-point rate increase by the end of the year. The yield on the 2-year Treasury note , which is highly sensitive to Fed rate expectations, was down more than 21 basis points in the session. Financial markets went a step further, betting that the Fed won't raise rates any further from here and will be reducing them by this summer. "The Fed has been spooked by Silicon Valley Bank and other banking turmoil.

The latest move to restore calm to restive regional bank stocks came as Pacific Western Bank (PACW.O), one of the regional lenders caught up in the market volatility, said it had raised $1.4 billion from investment firm Atlas SP Partners. While that deal brought some respite to battered banking stocks, First Republic (FRC.N) remains firmly in the spotlight. For now, the rescue of Credit Suisse appears to have calmed the worst fears of systemic contagion, boosting shares of European banks (.SX7P) and U.S. lenders (.SPXBK). Reuters Graphics Reuters Graphics'HEAD IN SAND'The wipeout of Credit Suisse's Additional Tier-1 (AT1) bondholders has sent shockwaves through bank debt markets. Seeking to boost confidence among investors rattled by its $3 billion Credit Suisse rescue, UBS said on Wednesday it would buy back 2.75 billion euros ($2.96 billion) worth of debt it issued less than week ago.

Two of the Fed's 12 regional bank presidents resigned as a result of that scandal and Powell launched a fast overhaul of the central bank's ethics rules as criticism mounted. Senator Elizabeth Warren, a longtime Powell opponent, saying she had lost confidence as well in San Francisco Fed President Mary Daly, whose bank was responsible for supervising SVB. Still, turbulence in financial markets and the banking system is likely to feature prominently in Powell's post-meeting news conference, which is scheduled to begin at 2:30 p.m. EDT (1830 GMT). The U.S. central bank will release its policy statement and new economic projections from Fed officials at 2 p.m. EDT. Market expectations are tilted heavily towards the Fed approving another quarter-of-a-percentage-point rate increase, which would lift its benchmark overnight interest rate - the federal funds rate - to the 4.75%-5.00% range.

"This is all a bit of a mess," Krishna Guha, vice chair of ISI Evercore and a former New York Federal Reserve official, wrote ahead of a Federal Open Market Committee meeting that has veered from a dead-certain jump in interest rates two weeks ago to a speculative morass. The yield on the 2-year Treasury note - particularly sensitive to Fed policy expectations - rose steadily through the day, adding roughly a quarter of a point from the overnight low and approaching 4%. Analysts trying to parse what recent bank stress might mean said a coming credit contraction could be the equivalent of an additional quarter point Fed rate increase, or as much as a recession-inducing 1.5 percentage points, rendering further rate hikes obsolete. "The emergence of financial stress is likely to indicate to the committee that monetary policy is closer to being 'sufficiently restrictive' than some may have thought previously," BOA economists wrote. "At the very least, stress in financial markets suggests that the Fed should proceed with caution."

The influence of Fed rate hikes "is going to hit...That is how it is designed." As of December officials expected the policy rate would rise to around 5.1% by year's end. The experience of 1970s-era central bankers informed not only the extent of the rate increases, with the policy rate rising 4.5 percentage points from near zero as of last March. None of those reforms prevented SVB from funneling its rapidly growing deposits into long-term government bonds that lost value as the Fed raised rates. The Fed has announced a review of its supervision at SVB to see if warning signs were missed.

There is so much money out there," he said, from pandemic spending programs as well as recent federal government initiatives like the Inflation Reduction Act. Is the economy really standing firm against the Fed's aggressive rate moves? Rate increases have averaged more than half a percentage point at each of the eight Fed meetings since March of 2022, and pushed the benchmark overnight interest rate from the near-zero level to the current 4.50%-4.75% range. Reuters Graphics Reuters GraphicsDOGS THAT DIDN'T BARK (YET)Construction: The status of the construction industry shows the Fed's pandemic-era dilemma. The Fed's rate increases have had an impact.

The determination is intact," European Central Bank President Christine Lagarde said in remarks after the policy decision. "There is no tradeoff between price stability and financial stability ... we are addressing the price stability issue by raising the interest rate by 50 basis points ... Beyond the rate increase, the Fed will also be debating changes to its policy statement that could prove consequential. In crafting their next policy statement officials will have to decide, for example, whether to continue to anticipate the need for "ongoing increases" in the policy interest rate, or to temper that seemingly open-ended commitment with language that indicates rate hikes could pause at any moment, given the new risks. They will also be issuing new economic and interest rate projections that could add a further dose of caution.

Yields on Treasury bonds, meanwhile, increased as investors discounted the likelihood that the Fed would shy away from further rate increases. The Fed's preferred measure of inflation is running at almost three times the central bank's target. Important aspects of both reports, however, moved in the favor of a more tempered Fed policy. Wage growth continued to slow in February, and much of the jump in prices last month was driven by the cost of shelter, an area where Fed officials feel inflation will soon prove to be slowing. "The Fed can support liquidity in the banking system and tighten monetary policy at the same time," Sweet said.

The inflation rate in January actually rose, while an Atlanta Fed real-time projection as of March 8 showed gross domestic product expanding at a 2.6% annual rate, well above the economy's roughly 2% underlying potential. As of December the high point for the target federal funds rate was expected by most officials to be 5.1%. Government reports released after Powell's last press conference showed the central bank's preferred measure of inflation had risen slightly to a 5.4% annual rate. It is not the first time the Fed has been caught out by after-the-fact data updates. And Powell is trying to be nimble," said former Fed economist John Roberts.

WASHINGTON/SINGAPORE, March 13 (Reuters) - U.S. authorities launched emergency measures on Sunday to shore up confidence in the banking system after the failure of Silicon Valley Bank (SIVB.O) threatened to trigger a broader financial crisis. Silicon Valley Bank (SVB), a mainstay for the startup economy, was a product of the decades-long era of cheap money, with unique risks that made it especially vulnerable. With the Fed poised to continue raising interest rates, investors said the financial system may not be fully out of the woods just yet. Goldman Sachs' analysts said they no longer expect it to raise rates at that meeting, amid the stress in the banking sector. A senior U.S. Treasury official said the actions taken would protect depositors, while providing additional support to the broader banking system, but officials and regulators were continuing to monitor financial system stability.

WASHINGTON, March 12 (Reuters) - Earlier this month the U.S. Federal Reserve in a report to Congress gave what has become a standard reassurance: Banks were strong and the overall financial system in solid shape. Regulators on Sunday were working on a response to contain any fallout from the bank's collapse, including a sale to another institution able to make depositors whole. More broadly, the Fed has tools that are always available to shore up the financial system, including direct loans to banks with adequate collateral through its so-called discount window. Karim Basta, chief economist for III Capital Management, wrote on Sunday, mapping out the potential trail from SVB's collapse to broader macroeconomic implications. "Large banks continue to have ample liquidity to meet severe deposit outflows," the Fed report said.

WASHINGTON (Reuters) - The U.S. administration stepped in on Sunday with a series of emergency measures to shore up confidence in the banking system after the failure of Silicon Valley Bank threatened to trigger a broader systemic crisis. “The American people and American businesses can have confidence that their bank deposits will be there when they need them,” Biden said in a statement. Silicon Valley Bank (SVB), a mainstay for the startup economy, was a product of the decades-long era of cheap money, with unique risks that made it especially vulnerable. With the Fed poised to continue raising interest rates, investors said the financial system may not be fully out of the woods just yet. “Going forward, we will work with Congress and the financial regulators to consider additional actions we could take in the future to strengthen the financial system,” the official said.

The U.S. unemployment rate ticked up to 3.6% in February as more workers entered the labor force, and wage gains slowed to 0.2% from 0.3% in January, the Labor Department's report showed. "This report screams soft landing and looks to be a pretty good one for the Fed," said Omair Sharif of Inflation Insights. After the report, futures tied to the Fed policy rate pointed to a quarter-point rate hike as the most likely outcome of the central bank's meeting this month. Traders also slashed expectations for the Fed to ultimately raise rates any higher than 5.5%. "However, the February CPI report will also weigh heavily in the Fed’s deliberations of whether to raise rates 25bps or 50bps.

"We have not made any decision," Powell said, but will be looking closely at upcoming jobs data on Friday and inflation data next week in deciding whether rate hikes need to shift back into a higher gear. Recent inflation data was worse than expected, and revisions to prior months showed the Fed had made less progress than expected in returning inflation to its 2% target from current levels that are more than double that. At the margins, however, some of the data did move in ways consistent with the softer job market the Fed hopes will develop. In their last set of projections, in mid-December, the median estimate of the high point of the Fed's benchmark overnight interest rate was between 5.00% and 5.25%, versus the current 4.50%-4.75% range. Reporting by Howard Schneider, Ann Saphir and Lindsay Dunsmuir; Writing by Dan Burns and Paul SimaoOur Standards: The Thomson Reuters Trust Principles.

"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell said. Republicans focused on whether energy policy was restricting supply and keeping prices higher than needed, and whether restrained federal spending could help the Fed's cause. As of December, officials saw that rate rising to a peak of around 5.1%, a level investors expect may move at least half a percentage point higher now. With a 50-basis-point rate hike now in play, Brown said a strong monthly jobs report on Friday would likely lead to "calls for a 6% terminal rate," nearly a percentage point higher than Fed officials had projected as of December. How much remains unclear, but Powell said the focus will remain more squarely on how inflation behaves.

"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell said. The Fed's benchmark overnight interest rate is currently in the 4.50%-4.75% range. Senator Sherrod Brown, the Democratic chair of the committee, said the Fed's rate hikes ignored what he viewed as a chief cause of inflation - high corporate profits. "To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions," Powell said. Powell's last monetary policy report to Congress was in June, which was early in what became the most aggressive cycle of Fed rate increases since the 1980s.

While ostensibly focused on monetary policy, the questions tend to range across issues, and the sessions this week - the first since Republicans took control of the House after midterm elections - may be particularly wide in scope. Powell's last monetary policy report to Congress was in June, early in what became the most aggressive cycle of Fed rate increases since the 1980s. Fed rate hikes "are designed to harm the labor market. Despite some high-profile layoff announcements, weekly new jobless claims have remained below 200,000 for seven consecutive weeks, comparable to pre-pandemic levels. That ongoing strength has posed perhaps the key question for Powell to answer: Whether the impact of monetary policy is just delayed and on the way, or whether the current economy needs even tighter monetary policy, with all the risks that entails.

"If corporate profits were to decline from the extremely high levels that we saw recently, would it be possible to sustain" growth in workers' benefits "even as we get inflation down to the target of 2%?" Democratic Senator Chris Van Hollen asked Powell during the Fed chief's semi-annual testimony before the U.S. Senate Banking Committee. "Wages affect prices and prices affect wages," Powell said, associating current earnings growth to the current ultra-low unemployment rate of 3.4%, and suggesting the labor market may need to weaken at least somewhat for inflation to fall. SHORTAGESUltimately, Powell said he felt profits would likely moderate on their own as the U.S. economy moves beyond the pandemic. "What we're seeing in the economy is pretty much about shortages ... supply chain blockages," Powell said.

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