Fed's Kashkari echoes concerns of 'credit crunch' as fallout from banking turmoil
WASHINGTON (TND) — It will take more time for the stresses in the banking sector to be fully realized after the collapses of Silicon Valley Bank and Signature Bank, according to Minneapolis Federal Reserve Bank President and CEO Neel Kashkari.
He told CBS's Face the Nation fundamentally, the banking system is sound but some banks are exposed to duration risk from long-term treasury bonds and losses from commercial real estate assets.
“Well, it definitely brings us closer [to a recession]. Right now, what’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch and then that credit crunch — you’re right just as you said — would then slow down the economy. This is something we are monitoring very, very closely," Kashkari said.
He echoed Federal Reserve Chair Jerome Powell's view that tighter financial conditions like a credit crunch, which happens when a bank won't lend, could mean less monetary policy tightening will be necessary. Following the rollout of a 25 basis point rate hike last week, Powell said it's too soon to determine how that will play out.
"As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we now anticipate that some additional policy firming may be appropriate," Powell said.
International Monetary Fund Managing Director Kristalina Georgieva brought up the banking turmoil during remarks at the China Development Forum on Sunday in which she said 2023 is expected to be another challenging year.
"At a time of higher debt levels, the rapid transition from a prolonged period of low-interest rates to much higher rates — necessary to fight inflation — inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies," Georgieva said.
She described policymakers' response as decisive and credited it for easing some market stress.
"But uncertainty is high which underscores the need for vigilance," she said.
Highly anticipated government reports will come later this week in Thursday's second revision of fourth quarter GDP and Friday's Personal Consumption Expenditures Price Index.
