- The implosion of Silicon Valley banks has increased the likelihood of a US recession.
- That’s because the fear of a banking crisis could distract from the Fed’s goal of lowering inflation.
- “I don’t think we can make it through the next 12 months without going into a recession,” a source told Insider.
Wall Street is concerned that the bankruptcy of Silicon Valley Bank has significantly increased the risk of a US recession.
The main concern is that the Federal Reserve’s mandate to continue fighting inflation has been complicated, and the turmoil could spell trouble for the economy heading into the rest of the year.
Goldman Sachs this week raised the chance of a recession this year from 25% to 35%, citing recent volatility and short-term stress from the SVB collapse. And judging by the signals in the bond market, investors agree. The reversal of 2-year and his 10-year Treasury yields is a notorious indicator of an upcoming recession, but in early March he began issuing the biggest recession warnings in 42 years.
Yields on 2-year US Treasuries recorded their biggest two-day drop since the 2008 recession last Friday when the SVB was taken over by the FDIC. According to “bond tycoon” Jeffrey Gundlach, this is another dark omen. reverse months before recession.
In a recent interview, the billionaire investor said of his recession outlook: “At this point where the reverse is happening, a four to six month time frame is starting to look more reasonable. there is,” he said. CNBC.
Fed fund futures are pricing in a rate cut of 75 basis points by the end of 2023. This suggests that the market recognizes the need for significant monetary easing before the end of the year. recession.
“I think a recession is very likely. I can’t imagine the next 12 months going by without a recession,” DataTrek co-founder Nicholas Colas told Insider. . The severity of the impending recession will become clearer once the Fed announces its next policy decisions at its March 21-22 meeting, he said.
The next rate decision will come after a few weeks of market turmoil, including the March 10 failure of the Silicon Valley Bank, which sparked a sell-off in bank stocks and fueled fears of another banking crisis. This event puts pressure on the Fed to ease rate hikes to avoid putting pressure on the financial system.
This could be taken as a signal that a recession is unlikely, but given that commentators say any further hikes in rates would tighten the economy too much, the Fed is more likely to It will change direction in response to stress on the system.
But it’s a tough call for officials to stop raising rates or start cutting rates in response to what some say is enough evidence that the Fed has broken something in the economy.
Too low interest rates could thwart the goal of lowering inflation. This is still the economy’s main concern, even in light of the banking turmoil.
On the other hand, too high interest rates are also a problem. Corus hesitated to say a banking crisis could be in the cards.Other experts say contagion from the SVB collapse is unlikely.
“This is a real warning about the health of the financial system. It may be confined to that bank. It may spread broader. It may affect other issues,” he said. warned.
Central banks are basically caught between fighting inflation and containing volatility.
Corus said the bank turmoil itself could slow the economy, as banks have scaled back lending activity and tightened financial conditions in general, unrelated to the Fed’s move. .
All eyes are on the Fed’s next policy meeting on March 21-22. The market expects a 25 basis point rate hike, or possibly a moratorium, next week, according to the Fed. CME FedWatch Tool.
Corus speculates that a 25 basis point rate hike would be enough for the Fed to keep bank-related volatility in check while maintaining its inflation target. A moratorium on interest rates would be a big warning, he said.
“If the Fed were to stop completely, it would be a wake-up call to the market. It’s a deal,” he said.