In short, the Federal Reserve took repeated swings at the job market and hit the banking sector instead.
In short, the Federal Reserve took repeated swings at the job market and hit the banking sector instead.
To cool the job market, the Fed aggressively raised rates from the historic lows that had underscored the economy over the last decade. In February 2022, its effective target rate was near zero. In March 2023, it was 4.5% to 4.75% — the highest it has been since 2007, but the rapidly raising rates instead exposed systemic weakness in several large banks.
“It is often said that the Federal Reserve raises rates until something breaks. Well, something has broken,” said Anirban Basu, senior economist at the Associated Builders and Contractors trade group. “This is an unintended consequence, but not entirely unpredictable.”
“The Federal Reserve raised interest rates to tame inflation by encouraging saving and discouraging lending. However, cooling down the economy exposes risky bets of it, and eventually, something breaks down,” said Yohay Elam, senior financial analyst at FXstreet.com “The failure of Silicon Valley Bank implies tighter lending conditions from other banks and a significantly faster cooldown of the economy, obviating the need for further rate hikes.”
Elam said he expects the Fed to leave rates unchanged at its next meeting, but that its next steps would depend on the stabilization of the banking sector. If it does, the Fed could resume rate hikes in May.
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