Silicon Valley Bank collapsed, triggering a number of subsequent bank runs and shaking the confidence in the financial sector.
While the collapse is unfortunate, I believe it is a win for the Fed. And I’d argue that the Fed needs to continue to increase rates.
The Fed is on a mission to control inflation while promoting economic growth. One can argue these are conflicting statements, and more often than not the Fed is focusing on one side of that scale. And 2023 is a year of controlling inflation, the ‘22 rate hikes slowed down inflation but did not hit a satisfactory target.
Inflation happens when money is “cheap” and monetary supply is high. While consumer spending is one part of the puzzle, the larger portion of monetary supply comes from lending activities. For much of ‘22, lending slowed but was still strong. For the most part, homes were selling at a healthy pace and both home equity and business loans were relatively easy to secure.
That will change with the collapse of SVB. Banks will get stingy with lending, because they are valuing liquidity over interest margins. This is a big win for the Fed, banks will start to aggressively limit loans and increase their interest rate without the Fed having to step in.
Going back to my argument that I believe the Fed needs to continue to increase rates. If the Fed softens the messaging now by withholding additional rate hikes, banks will respond by thinking that their liquidity troubles are temporary, and act like it’s ‘22 again, which will continue the trend of mid-level inflation.