As government officials testify before congressional committees about the consequences of the recent bank collapses, an important question arises: What will this mean for the economy?
Federal Reserve officials have made it clear that they expect a slowdown in bank lending related to the tumult from weigh on economic growth this year, but the magnitude is uncertain. And much of the potential fallout depends on what comes next.
If the banking turmoil dissipates in the coming weeks, lending and financing standards could return to something similar to normal, and the economic fallout may not be material.
But if the turmoil continues, or if it creates knock-on effects in other parts of financial markets and the economy, the hit could be significant. If banking problems make it difficult to obtain loans or issue debt, it means that fewer companies can expand and hire staff, among other problems. Those problems might even be enough to push the United States into a recession.
“It definitely brings us closer” to a recession, Neel Kashkari, president of the Minneapolis Federal Reserve Bank, said on CBS News’ “Face the Nation” this weekend. “At this point, what’s not clear to us is how much of these banking stresses are leading to widespread credit crunch.”
Mr. Kashkari noted that some capital markets have been largely closed for weeks, and that if “the capital markets remain closed because borrowers and lenders are still nervous, then that would tell me, okay, this will probably have a greater impact on the economy. .”
The riskiest companies have been mostly frozen of the debt markets since the beginning of this month. At the same time, some of the healthiest corporate borrowers managed to issue bonds again this week, a hopeful sign, even if their borrowing costs were unusually high.
Investors and economists are watching other risks, such as the effect of the banking turmoil on commercial real estatewhich was already facing office vacancies caused by the pandemic and which has traditionally relied on loans from small and medium-sized banks.
With the scope of the fallout so unpredictable, Fed officials have been hesitant to react too decisively. Central bankers raised interest rates by a quarter of a point last week as they continued their fight against inflation, while suggesting they did not know what would come next.
“Events in the banking system in the past two weeks are likely to result in tighter credit conditions for households and businesses, which in turn would affect economic outcomes,” said Fed Chairman Jerome H. Powell, at a press conference after the tax. increase. “It is too early to determine the extent of these effects, and therefore too early to say how monetary policy should respond.”
