Federal Reserve Could Trigger New Bank Failures, Expert Warns

The Debate Over the Fed’s Rate Cuts Intensifies

The debate on when the Fed will finally be able to cut rates is becoming increasingly intense, with the latest statement sounding like an alarm for banks.

Specifically, speaking on Yahoo Finance, Mark Zandi of Moody’s expressed his concern about the Federal Reserve’s wait-and-see approach in starting to lower the high cost of money.
Despite the U.S.
so far avoiding the specter of recession, economic growth is at risk with interest rates at such high levels for a prolonged period.

Why the Concern Rises: Fed, Rates, and Bank Failures

“The Federal Reserve would do well to cut interest rates as soon as possible, as there are parts of the economy at risk of ‘breaking’ if rates do not fall,” Mark Zandi, Chief Economist at Moody’s Analytics, warned.

The expert cautioned about the consequences that could arise if the central bank does not begin to lower the cost of money in the coming months.
Keeping rates at the current level increases the risk of recession and could cause further cracks in the financial system, according to Zandi.

“These rates are corrosive to the economy, and at some point, something could break.
The risk is that a recession will occur…
I would really cut rates at this point because I think it would be a relief for the economy,” explained Zandi.

The Impact of High Interest Rates on Banks

A high cost of money erodes investment capacity and consumer demand, as it makes loans more expensive and mortgage rates more burdensome.
The high financing costs have led to slow loan growth and are “eroding” credit conditions, which could stress the banks’ balance sheets.

Zandi focused on the impact on credit institutions under pressure.
The economist recalled the regional bank failures of last year, starting with the initial collapse of Silicon Valley Bank, which triggered a brief banking crisis that led to the default of two other credit institutions.

“This is the kind of thing that worries me in a context of persistently high interest rates,” he said.
The concern is twofold.
On the one hand, with higher rates, it becomes difficult to honor the loans issued by banks, with the risk of unpaid debts and therefore missed income for bank balance sheets.
On the other hand, the effects are on the bonds held by banks, which with rising rates – and yields – lose value over time.
Not to mention the real estate sector in deep crisis with aggressive monetary policy since 2022.
Loans granted to commercial real estate companies pose a realistic insolvency threat.

Not surprisingly, other market commentators have warned of further banking turmoil.
Billionaire investor Barry Sternlicht predicted that the United States might have to face weekly bank failures, partly due to the impact of high interest rates on commercial real estate loans.

Zandi predicted that the Fed will likely wait another two or three months before easing its monetary policy.
Will this time be enough to ensure stability?

Author: Hermes A.I.

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