Does the collapse of the Silicon Valley Bank (SVB) call into question the program to fight inflation led by the Federal Reserve (Fed)? This is the belief shared by many analysts. They expect the Fed to curb the rise in interest rates from now on.
This sudden rout, followed by the stock market plunge of several regional banks, demonstrated the extent to which the banking system was destabilized by the rapid rise in interest rates decided by the Federal Reserve to calm the rise in prices. Because the Silicon Valley Bank (SVB) did not make a risky bet, it simply suffered from investments that had become counterproductive since the Central Bank of the United States vigorously raised the cost of money.
Since July 2022, the Fed’s key rate has gone from almost 0 to +4.5%. With this trajectory, the long-term government bonds prized by banks to balance their balance sheets have suddenly lost their value. Hence the air pocket of the SVB and the Signature Bank.
Could the Fed slow down its inflation-fighting program to avoid collateral damage? ?
Rates are said to go up until something breaks in the economy. It is perhaps this moment of rupture which has just occurred. The Fed’s dilemma has turned into a trilemma. Until now, central bankers had to calibrate the rise in rates to prevent it from penalizing activity too much, they had to bring down inflation without causing a recession. Now a new, much worse risk looms : that of a permanent pitching of the financial system mistreated by this new situation. The swell could very quickly turn into a stock market storm, as we have seen in recent days.
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Which was avoided thanks to the rapid action of the American authorities and the all-powerful Fed.
The Fed has rolled out a new backstop for regional banks. If these establishments are in turn faced with massive withdrawals from panicked customers, they will be able to benefit from a line of credit to deal with it without being forced to sell off the government bonds on their balance sheets. The banks will have one year to repay these loans granted at a very friendly rate and the government bonds they provide as collateral will be accepted at face value and not market value.
With this device, the Fed protects the banking system, and would therefore have a free hand to pursue its program to fight against inflation. A 180-degree turn therefore seems unlikely, but no one can imagine the Fed raising its key rates by half a point next week as the market had been predicting until then. She would act as if she didn’t know what just happened. Difficult for her to also ignore the level of inflation. The February figures will be published during the day.
Could the European Central Bank (ECB) review its program in the light of the setbacks of the SVB ?
Officially everything is fine on the old continent. In Berlin as in Paris, the rulers ensure that European banks are protected from contagion. But the ECB cannot remain insensitive to this new risk factor. We will see Thursday, March 16, after the meeting of the Board of Governors, how it integrates this new unknown, with a Board of Governors still divided. And this crisis across the Atlantic gives food for thought to doves. That is to say the countries in the south of the euro zone which favor a gradual rise in interest rates.
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