Historically high interest rates in the United States could “exacerbate” the stress on an already shaky banking system, a member of the Federal Reserve’s Board of Governors said Wednesday.
The governor also hinted that the central bank may decide not to raise the benchmark interest rate at the next meeting of the Federal Open Markets Committee (FOMC), which could have implications for the price of Bitcoin.
Rising Rates and Rising Debt
Fed Governor Philip N. Jefferson comments on the economic outlook of the US financial system during a speech at the 22nd Annual International Conference on Policy Challenges for the Financial Sector in Washington DC
While claiming that the banking system has “stabilized” after several bank runs and foreclosures in March, the governor acknowledged the risks associated with high short-term interest rates, which are “5 percent score higher than a little over a year ago.”
As Jefferson explained, the effects of fiscal policy work at “long and variable lags,” which cannot be fully accounted for in just one year. For the rest of the year, he predicted slower growth amid “increased uncertainty” and a decline in household savings and tight financial conditions.
Although the governor did not predict a recession, he admitted that the combination of low incomes and high rates could “test the ability of businesses to service debt. ”
“Furthermore… higher interest rates may increase the stress on banking organizations, especially those exposed to higher assets and with a relatively high ratio of uninsured deposits to total deposits,” he continued. he.
Will the Fed ‘Skip’ a Rate Hike?
When Silicon Valley Bank (SVB) experienced a bank run in March, it happened after the company disclosed a $1.8 billion realized loss on its long-duration bonds.
Insurance coverage ultimately did not matter for SVB, as the Federal Reserve, Treasury Department, and FDIC agreed at the time to fully bail out all depositors as “systematic risk exception.”
Movement critics THE audience how the rescue activity of the central bank returned most of its progress to the attempt to withdraw liquidity from the economy, which will contribute to inflation for assets like Bitcoin again.
The governor floated the idea that the Fed could “hold” the policy rate constant at a “future meeting,” but that shouldn’t mean the Fed has reached the “highest rate for this cycle.”
“In fact, skipping a single rate hike at the upcoming meeting will allow the Committee to see more data before making decisions about the extent of further policy tightening,” he concluded.
Rising rates have pushed Bitcoin and stocks throughout 2022, making an approaching peak rate potentially bullish for the asset. That said, analysis suggests that Bitcoin may not be affected by rate hikes like last year.
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