A hard job just got harder for the Federal Reserve after the biggest U.S. bank failure since 2008 overshadowed another strong payroll report.
Officials weighing if February’s jobs data boosted the case for a half-point rate hike this month must now also consider if the collapse of Silicon Valley Bank gives grounds for caution that they cannot ignore.
“The market and banking sector turmoil will be a strong argument in favor of 25 basis points,” said Stephen Stanley, chief U.S. economist for Santander U.S. Capital Markets.
“At a minimum, it should serve as a reminder to policymakers that they have implemented a lot of tightening over the last year and not all of the impact of those moves have shown themselves yet. Thus, it serves as a compelling reason to tread carefully,” he said.
Regulators seized SVB on Friday in a stunning downfall for a lender that had quadrupled in size over the past five years and was valued at more than $40 billion as recently as 2022.
The development rattled markets around the world with U.S. stocks falling and risk assets taking strain. The worry is that it could be a sign of bigger problems as banks cope with the Fed’s cumulative 450 basis points of rate increases since this time last year to tackle high inflation.
Matthew Luzzetti, chief U.S. economist for Deutsche Bank Securities, said SVB’s demise was helping tighten financial conditions and could allow the Fed to take less aggressive actions if sustained.
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“If it’s short term moves in financial conditions, it shouldn’t impact the Fed outlook at all,” Luzzetti said. “If it’s a sustained tightening of financial conditions, then all else equal, it means the Fed may have to do less.”
But even as bank stocks plunged, more evidence emerged of the underlying strength of the U.S. economy.
Labor Department data earlier Friday showed employers added 311,000 new workers last month after a revised 504,000 advance in January. Unemployment rose to 3.6% as the labor force grew, and monthly wages rose at the slowest pace in a year.
Chair Jerome Powell said this week the Fed is likely to lift rates to a higher peak than previously expected, putting a half-point increase on the table when officials meet later this month to curb inflation. He cited an overheated job market as a factor driving higher prices.
That led to more investors wagering on a 50 basis-point hike in March. But they trimmed those bets amid jitters over the impact of rising rates on the financial sector spurred by SVB. They now see the Fed cutting rates before the end of the year.
The Fed raised its benchmark rate by a quarter percentage point to a range of 4.5% to 4.75% on Feb. 1. The smaller move followed a half-point increase in December and four jumbo-sized 75 basis-point hikes prior to that.
What Bloomberg Economics Says...
“We believe SVB Financial Group’s collapse is not an indictment of too-tight monetary policy, and so doesn’t have clear implications for the broader financial system and economy. If the February CPI data exceed expectations on March 14, we don’t think the SVB collapse will prevent the Fed from raising rates by 50 basis points at the March 21-22 FOMC meeting.”
- By Stuart Paul (Economist)
- To read more click here
“I’m still leaning towards 50,” basis points, said Diane Swonk, chief economist at KPMG LLP, commenting on the potential implications of the tremors in the banking sector. “It doesn’t look like what we’re seeing is of the magnitude to force the Fed to back off.”
Officials next meet March 21-22. They will get another reading on inflation with February consumer prices released Tuesday.
Fed officials have made no public comment on the latest economic data or what SVB could signal about the impact of their aggressive rate hikes over the last 12 months on the wider banking sector. They will enter their pre-meeting blackout period at midnight Friday.
Economists at Barclays Plc, who raised their Fed rate call to a half-point move following the payroll report, said they viewed SVB as an isolated event that could have wider implications.
“It raises risks of broader distress within the banking system that could make the FOMC reluctant to return to 50bp hikes in March,” they wrote in a note to clients. “Indeed, the possibility of capital losses at other institutions cannot be completely dismissed, with rising policy rates raising banks’ funding costs.”
—With assistance from Rich Miller and Vince Golle.
