Banking Crisis and Stock Rally Impact Fed Rate-Hike Probability
Federal Reserve Rate-Hike Odds Jump on Bank Crisis Twist, Stock Rally
As the banking crisis takes unexpected twists, the likelihood of a Federal Reserve rate hike next week has become more probable. With the S&P 500 rallying, the odds have slightly favored another in May. Banking concerns have gone beyond deposits to a broader credit crunch and potential recession that could affect the entire economy.
Regulators are in panic mode while trying to reassure customers that deposits above $250,000 are not supported by FDIC insurance. The Fed, FDIC, and Treasury Department have moved to shore up customer confidence by announcing that such deposits would be made whole.
All the major banks were also in talks with regulators to join together to deposit more than $25 billion at the First Republic, signs of a rescue that have turned the tide of the banking crisis, at least for the moment. However, it remains to be seen whether there’s enough help for smaller banks.
JPMorgan, in particular, seems keen on the new Fed program that offers a one-year bank term funding platform to address deposit outflows. The bank believes that the program will result in $2 trillion in liquidity to banks, even if the biggest banks do not tap it.
– Both S&P Global and Fitch Ratings had cut their credit rating for the First Republic to ‘junk’ status.
– Fitch cited First Republic’s high concentration of wealthy and financially sophisticated customers in coastal markets as giving it an unusually high share of uninsured deposits.
– The Fed program allows banks to put up their fallen government bonds and mortgage securities as collateral for low-cost Fed loans based on their initial or par value.
The banking crisis has raised concerns beyond deposits, with the threat of a broader credit crunch and a potential recession. Banking regulators use multiple tactics to shore up confidence and maintain calm, but more action may be necessary to prevent a full-fledged crisis.
In conclusion, the banking crisis has taken an unexpected twist, with all major banks negotiating to deposit more than $25 billion at First Republic. While this has somewhat eased banking concerns, it remains to be seen whether smaller banks will get the help needed. Banking regulators have taken steps to shore up confidence, but it may not be enough as the threat of a broader credit crunch and potential recession looms large.