Credit crunch

Good Morning. I'm Jason Ma , writing to you from Los Angeles.?Between fighting inflation or the bank crisis, the Federal Reserve leaned toward the former. Not only did policymakers?raise rates by another quarter point , dashing some hopes for a pause in tightening, the so-called dot plot of their forecasts indicated another increase is coming later this year. It signals the end of the tightening cycle may be at hand, though not soon enough for some who think the central bank has already done enough.?

Wednesday's move comes despite the bank crisis, which previously led investors to price in a series of Fed rate cuts starting this summer. On Wednesday, Chairman Jerome Powell largely stuck to the same anti-inflation script he has been working from during the hiking cycle, which has now sent rates up by 475 basis points over the last year.

But he also acknowledged that if credit tightens across the broader financial system, then the Fed may not have to do as much tightening with its monetary policy. Indeed, Wall Street has started pointing to the facts on the ground when it comes to financial conditions.

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1. A credit crunch was already expected even before the Fed meeting. Banks, especially smaller ones, have been trying to preserve capital, as depositors grow nervous about how much of their money will be guaranteed by the FDIC.??

Vulnerable US lenders have lost around $500 billion ?since Silicon Valley Bank collapsed, with clients putting it in safer havens, such as money-market funds and bigger banks, according to JPMorgan. The Fed has also provided hundred of billions of dollars in liquidity to prevent a repeat of SVB at other banks, but more federal intervention may not be enough.

"An FDIC guarantee of all US bank deposits would certainly help, but it might not be enough to completely stop this deposit shift,"?JPMorgan said.

The upshot for the economy is that banks could become more cautious about lending, and smaller banks account for a disproportionate share of commercial and personal loans, analysts added.

In fact, mid-size banks account for 43% of total commercial loans in the US, compared to 25% of total assets, according to JPMorgan. And small US banks account for 39% of consumer loans, compared to just 20% of assets.

Banks have been making it more difficult for potential borrowers?to get access to credit, surveys of senior loan officers show. After the banking industry's distress over the past two weeks, "there's no going back on that ," said Bob Michele , chief investment officer of fixed income at JPMorgan Asset Management.?

"We're all doing the work for the Fed anyway. They can hit the pause button. The banks are still tightening credit conditions and … non-bank lenders are as well," he told Bloomberg TV hours before the Fed meeting.

Meanwhile, Wharton professor Jeremy Siegel said the banking crisis has made him more optimistic for the US economy next year, because?the turmoil means the Fed should ease up on rate hikes .?

How easy or difficult has it been for you to get a bank loan lately? Let us know in the comments.

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5. PacWest stock tumbled after the bank disclosed that deposits fell 20% since the end of 2022.?The lender said more than 65% of its deposit base was under the FDIC's $250,000 insurance coverage limit and that roughly $600 million of deposits were backed by tradeable securities.?PacWest has tapped Fed liquidity and got a cash from investment firm ATLAS SP Partners .

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This newsletter was curated by Jason Ma.