The Federal Reserve rate hike on Wednesday led to a deep selloff in US regional banks on Thursday.
Stocks of US regional lenders such as Western Alliance and Pacific West dropped over 60 percent before recouping some losses. First Horizon tumbled as much as 45 percent, its biggest intraday fall since the 2008 financial crisis. Multiple other lenders, both large and small, too were caught up in the panic.
Now, the fear is that another financial shoe may soon drop.
All of this demonstrates how market anxiety persists after a series of bank failures and deposit outflows.
Investors are sounding the alarm that banking sector pressures are far from finished. In such a stressful scenario, some lenders have been trying to assure investors — with little to no avail.
All this despite reassurances from US Fed chair Jerome Powell that authorities are getting closer to managing the issue.
“We like and feel confident about the Fed stepping in to create some backstop for the regional banks post the Silicon Valley Bank-episode. But there’s certainly, you know, probably some more weakness to be seen in the sector as time continues to unfold,” Jason Ray, founder and investment director, Zenith Wealth Partners, told Reuters.
But the key question is: why global central banks are being blamed for the ongoing banking crisis?
Overall, major economies have raised rates by a whopping 40 percent combined in the current tightening cycle. The Fed has raised rates by 5 percent over the past year after openly dismissing rising inflation as transitory in 2021.
But central banks’ rhetoric in recent months has been the need to control soaring inflation. So, it is clear that major central banks were late in tightening policy to reign in inflation.
The central banks failed in their primary job of price stability. Their aggressive pace and the jumbo-sized interest rate hikes make one thing clear – major central banks panicked.
It takes at least two quarters for a policy decision to transmit into the real economy. But as many central banks were reacting rather than being pro-active, they lost control of inflation.
Now, fears of a harsh recession have been reinforced by a roaring selloff in regional banks.
As such, many analysts predict central banks will take their knives out before this year’s end. Traders have increased their bets on interest rate cuts from the Fed, with the first rate cut now expected to come as early as July 2023.
If that does happen, then the latest rate hike cycle will be remembered as the biggest policy mistake in the history of central banks.
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