The Fed’s Interest Rate Hike Could Create A “Domino Effect” Of Regional Bank Failures

The banking and financial crisis is far from over. Yesterday, the Federal Reserve hiked interest rates yet again to “fight” inflation, however, this could create a “domino effect” of regional bank failures. PacWest Bancorp is now considering a sale or “other moves” to keep it “solvent” for the time being.

The Fed raised the benchmark federal funds rate to a range between 5% and 5.25%, which is the highest level since 2007, at a time when bank customers are already feeling anxious after a string of recent bank failures.

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According to a report by Time, Fed Chair Jerome Powell said at a press conference that officials will watch to see whether future rate moves are necessary, hinting that Wednesday’s increase could be their last one for now depending on the extent of any lending pullback that follows last week’s collapse of First Republic Bank, the second-largest bank failure on record. “

A decision on a pause was not made today,” Powell said. “We will be driven by incoming data meeting-by-meeting and we will approach that question at the June meeting.”

While PacWest struggles and other banks rest on the brink of insolvency, Powell says the banking crisis is “over” even though it’ll have lasting effects.

“There were three large banks, really from the very beginning, that were at the heart of the stress that we saw in early March — the severe period of stress. Those have now all been resolved, and all the depositors have been protected,” Powell said, referring to the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank.

According to The Hill, he also said that the U.S. banking system is “sound and resilient” and that the conditions in the banking sector have “broadly improved” since early March. “We’re committed to learning the right lessons from this episode,” Powell added.

“Each incremental interest rate hike beyond what they had anticipated is going to exacerbate the banking problem significantly,” says Brian Bethune, a financial economist and economics professor at Boston College. “Once that trust starts to erode, then you have a domino effect. And we’re on the brink right now of a major domino effect in the regional banks.”

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