Despite fears of a banking crisis, the Federal Reserve looks set to hike rates further next week as the central bank balances its fight to contain inflation against mounting stress in the financial sector.
Wall Street’s major indices ended a chaotic week on another down note Friday, with the Dow Jones Industrial Average falling 384 points, or 1.19 percent, at the closing bell.
It comes as a $30 billion bailout for the troubled First Republic Bank failed to allay investor concerns, with the lender’s shares plunging another 33 percent that day, extending their losses for the week. up to 72 percent.
In Switzerland, shares of Credit Suisse fell 8 percent despite a $54 billion bailout from that country’s central bank.
The two banks have different problems facing them, but the biggest fear is that the banking system could collapse under the weight of the fastest rate hike in decades.
Despite fears of a banking crisis, the Federal Reserve looks set to raise interest rates further next week. Fed Chairman Jerome Powell is seen above
The Dow Jones Industrial Average fell 384 points, or 1.19 percent, at the closing bell
“If the Fed raises that much so quickly, something breaks,” said Ross Mayfield, investment strategy analyst at Baird. “There’s a very clear and distinct history of that happening, even in slower, smaller cycles of rate hikes.”
However, it increasingly looked like the Fed would push ahead with another rate hike at the end of its two-day meeting next week as it battles inflation that remained uncomfortably high at 6 percent last month.
While the Fed may change at any time as events unfold, financial markets on Friday afternoon predicted a 60 percent chance of another quarter-point rate hike at next week’s meeting, according to the CME FedWatch Tool.
Rate hike prospects have swung wildly, with a half-point hike seen as almost certain ahead of the two-bank collapse last weekend, and a lull priced in earlier this week as the banking crisis loomed.
Shares of the Big Four trillion-dollar US banks — JPMorgan, Bank of America, Citigroup and Wells Fargo — all fell at least 3 percent on Friday.
Other medium-sized US banks, including Western Alliance Bancorp and PacWest Bancorp, saw their shares drop 15 percent and 18 percent respectively, a worrying sign that markets fear the First Republic’s bailout will fail to contain the banking crisis.
The rescue plan for First Republic announced Thursday amounted to an unprecedented show of support for the troubled regional bank of nearly a dozen of the world’s largest financial institutions.
Fears of an imminent collapse of the San Francisco-based First Republic prompted Thursday’s bailout deal, drafted by top power brokers including US Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and JPMorgan Chase CEO , Jamie Dimon.
Rather than a government bailout or private buyout, the deal involved 11 major banks collectively depositing $30 billion as uninsured deposits with First Republic, providing an infusion of cash to help the bank meet customer demands comply.
As part of the plan, First Republic suspended its dividend, saying its borrowings from the Federal Reserve ranged from $20 billion to $109 billion between March 10 and 15.
It also disclosed that it had a cash position of approximately $34 billion, not including the $30 billion in new deposits from major US banks.
“While the new deposits in First Republic calmed the waters for the troubled bank, they are coming at current market rates, which will weigh on net interest income,” Art Hogan, chief market strategist at B. Riley Wealth Management, told Reuters.
“With a reduced profit profile, the bank may need to explore another sale.”
Financial markets predicted a 60 percent chance of another quarter-point rate hike at next week’s meeting on Friday afternoon, according to the CME FedWatch Tool
Despite the massive injection of private capital, markets still seemed to fear that First Republic would be dragged into a growing banking crisis
Shares of First Republic fell another 33 percent on Friday, extending their losses for the week to 72 percent
First Republic was embroiled in a deepening banking crisis triggered by the collapse of two other mid-sized US lenders in the past week.
The rescue package came less than a day after Swiss bank Credit Suisse took out an emergency loan of up to $54 billion from the central bank to bolster its liquidity.
New data from the Fed also showed the struggle for liquidity among US banks over the past week, as borrowing from the discount window rose to $153 billion on Wednesday, up from $5 billion a week earlier.
It was the largest loan amount ever recorded from the Fed’s rebate window, which offers banks 90-day loans at the central bank’s key rate, currently set at 4.75 percent after a year of steep increases.
“The data points to continued, credit-negative pressures on bank funding, consistent with Moody’s negative view of the US banking system,” Moody’s analysts wrote in a note.
“The surge in bank emergency loans out of the Fed’s discount window points to funding and liquidity pressures on banks caused by weakening depositor confidence,” the note added.
A separate Fed emergency program, the Bank Term Funding Program, saw lower demand, with banks borrowing just $11.9 billion despite more attractive one-year terms.
Customers line up outside a branch of Silicon Valley Bank in Massachusetts on Monday. The bank was seized by regulators last week and its parent company filed for bankruptcy protection on Friday
Regulators closed Silicon Valley Bank last Friday, making it the largest U.S. bank failure since the collapse of Washington Mutual during the height of the 2008 financial crisis.
The bank, which targeted tech startups, was forced to sell a hoard of government bonds and mortgage-backed securities to Goldman Sachs at a loss of $1.8 billion to cover a growing deposit outflow.
To close that gap, it attempted to raise $2.25 billion in new equity sales, but the news alarmed customers, who rushed to collect deposits from the bank, leading to an outflow of $42 billion. in one day.
The assets of the Silicon Valley Bank were seized by the FDIC and today the SVB Financial Group filed for bankruptcy, saying it has about $2.2 billion in liquidity.
At the end of last year, it had $209 billion in assets.