We know that the FED's biggest concern lately has been stubborn and high inflation rates. In the past few days, they've had to take on another obstacle, a trio of bank failures. The central bank announced the Bank Term Funding Program earlier this week, which provides one-year loans to banks and other financial institutions that offer up collateral like US Treasuries. This would allow banks with unrealized losses to swap out typically safe investments for a loan of up to one year worth the original value of the assets they're putting up as collateral.
This program is a form of monetary easing designed for emergency use when the Fed needs to prevent the next SBV from failing. There are risks, but the Fed believes the benefits outweigh these. This is also a clear example of the Fed acting as a lender of last resort.
The Fed is still of course working on managing inflation, and they believe that the program will only cause a "very minor delay" in getting back to the target inflation rate of 2%. The central bank is expected to continue increasing interest rates. However, the Fed's rate hikes actually factored into the SVB collapse. The higher cost of borrowing hurt the sector's profits and ability to raise funds which in turn forced tech companies to draw down on their bank deposits so they could fund operations. Although, this was not the leading cause of the collapse. It is important that this crisis is managed first before the Fed gets back to handling inflation rates.
https://www.cnn.com/2023/03/15/economy/fed-priority-cooling-economy-financial-stability/index.html
Crazy that all of a sudden it seems like there are banks falling out everywhere. Everyone is dealing with rising interest rates and it is absurd to think that a bank as prominent as SVB collapsed so badly partly because of those. Of course the Fed is pacifying the public about this matter, but it does make you wonder how confident they actually are that we're in a good place despite these collapses.
ReplyDeleteRecently another bank just reported bankruptcy, I wonder how many more will follow, how will this affect the FED working on inflation?
ReplyDeleteIt seemed like banks started collapsing out of nowhere a few weeks ago, although it is likely that there were signs much earlier indicating this was a possibility. It will be interesting to see how the Fed balances the management of this banking crisis and combatting inflation as it seems that their main method of fighting inflation is at least somewhat contributing the issues that banks are currently facing.
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