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Market Insider: May 9, 2023

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U.S. Money Reserve

May 9, 2023

On April 28, 2023, a report from the Federal Reserve blamed, in part, its own policies for the collapse of Silicon Valley Bank (SVB) the previous month. The Federal Reserve is now attempting to balance its fight against inflation with an attempt to stabilize the nation’s banking system—but the central bank’s fiscal policies regarding the former might make the latter far more difficult than expected.

American banks continue to experience volatility.

On May 1, 2023, regulators seized First Republic Bank and sold nearly all of its assets to banking giant JPMorgan Chase. First Republic’s collapse—now the second largest bank failure in U.S. history—follows the high-profile collapses of both Silicon Valley Bank and Signature Bank in March 2023.

On May 3, 2023, CNBC reported that regional bank PacWest Bancorp saw a $5 billion loss in deposits in Q1 2023, a 30% drop in the price of its stock, and had begun exploring options that include selling its assets.

In addition, a study published in March 2023 by the Social Science Research Network labels 186 banks as vulnerable to the same risks that collapsed SVB and First Republic. Concerns regarding the stability of the banking system have led to declining share prices for several banks, including Western Alliance and First Horizon.

Stacking blocks with bottom block labeled "SVB" being removed

The Federal Reserve is attempting to continue its inflation fight amid the banking trouble.

According to data released by the Labor Department on April 12, 2023, prices for consumer goods rose 5% from March 2022 to March 2023 as measured by the Consumer Price Index. Federal Reserve officials stated that their goal is to reduce the growth of inflation to 2% annually.

On May 3, 2023, the central bank raised interest rates by a quarter of a percentage point, to reach a target range of 5% to 5.25%. Since March 2022, the Federal Reserve has enacted 14 consecutive interest rate hikes.

Calculator reading "INFLATION" and word blocks spelling "FED" on pile of $100 notes

This latest rate hike may place further strain on the banking system.

DoubleLine Capital co-founder and chief executive Jeffrey Gundlach told CNBC’s Closing Bell on May 3, 2023, that the bank failures won’t end until the Federal Reserve cuts interest rates, saying, “Leaving rates this high is going to continue this stress. I believe with a very high degree of probability [there are] going to be further regional bank failures.”

Economists surveyed by the World Economic Forum (WEF) were concerned that the Federal Reserve’s inflation-fighting policies will make it difficult for private banks to remain stable. WEF director Saadia Zahidi explained to CNBC on May 1, 2023, “Most chief economists are expecting that central banks will have to play a very delicate dance between wanting to bring down inflation further and the financial stability concerns that have also arisen in the last few months.”

Lawrence Yun, chief economist for the National Association of Realtors, said the rate hikes were turning regional banks into what he referred to as “zombie banks,” unable to conduct normal banking operations. In a May 3, 2023, statement Yun said, “They are becoming zombie-like banks, unable to lend even to good businesses as they are more concerned with balance sheet shuffling for survival.”

While fiscal policy remains tight, banks seem likely to face continued strain.

Read U.S. Money Reserve’s “Market Insider” each week for more economic insights. Nothing herein should be considered as portfolio or retirement advice. U.S. Money Reserve (“USMR”) cannot and does not offer financial advice. Clients should consult a financial advisor for specific advice. This commentary is provided by USMR for informational purposes only and is provided on an “as is” basis without any warranty of any kind, whether express or implied. Your use of the information provided in this commentary is entirely at your own risk. In no event will USMR be held liable for any indirect, special, incidental, or consequential damages arising from the use of information contained in this commentary.

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