Federal Reserve Chairman Jerome Powell raised interest rates on Wednesday March 3 for the tenth time in just over a year, but he opened the door to a break after the central bank monetary policy committee. So everything went as planned, with the cost of money rising in one year from zero to more than 5%. The bank continues to raise its rates to fight against persistent inflation even if it has fallen (4.6% in March excluding energy and food).
But wasn’t that one time too many? Because while Mr. Powell is fighting inflation, bank failures have multiplied, with the debacle since mid-March of three establishments victims of the credit crunch. The latest bankruptcy is that of First Republic, a San Francisco establishment taken over by the giant JP Morgan on Monday 1er May at dawn. Admittedly, it is possible to blame the bad management and the bad supervision of these banks, but the hour is not any more with these questions: they are victims of the rise in the rates and the panic of the savers.
“The US banking system is strong and resilient”, assured the Fed in its press release on Wednesday. Except that two hours later, after the closing of the markets, the Bloomberg agency revealed that another establishment was in turmoil, the Pacific Western Bank. After losing 5 billion in deposits out of 32 billion this winter, this small bank based in Beverly Hills, a wealthy district of Los Angeles, is looking for capital or buyers. The action lost Thursday evening up to 58% of its value in informal exchanges after the close of markets, valuing the bank 330 million dollars, ten times less than at the beginning of March. Zion and Comerica, two other regional banks, were down more than 10% after the close, and no one can claim that the crisis is under control.
“zombie banks”
The chief economist of the association of real estate developers, Lawrence Yun, judged with CNBC that this increase in rates was “harmful and unnecessary”. According to him, regional banks “become zombie banks, unable to lend even to good companies because they are more concerned with restructuring their balance sheets for survival”.
So far, Mr. Powell has refused to correlate the level of rates to the banking crisis. He believes that financial conditions for banks have improved – investors are fleeing to risk-free Treasuries and driving down market rates, which lowers funding costs for banks. And he believes that the crisis will lead banks to be more restrictive in their lending to the economy. In short, financial magic: lower costs for somewhat relieved banks; higher costs for the economy which needs to be cooled. But the markets believe less and less in this happy scenario.
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