The Fed is “tone deaf” if it continues to hike interest rates right now, says top economist David Rosenberg. “We have a possible debt default on our hands and a spreading bank crisis … , and the Fed is going to raise rates tomorrow … These guys are tone deaf,” Rosenberg tweeted on Tuesday. In light of the JPMorgan-First Republic deal, Mohamed El-Erian is warning of “potential collateral damage,” pointing to the country’s recent trend of settling for “second best” solutions. According to El-Erian, Monday’s deal has created a much more concentrated banking system, and the risk of a credit crunch has become even more likely. Chris Whalen of Institutional Risk Analyst predicts the banking crisis will “keep moving up the food chain” unless the Fed cuts rates by at least 100 basis points. As of now, the Fed seems to have chosen to let the banking crisis reach “systemic proportions” in order to continue its fight against inflation.
Markets Insider/Zinya Salfiti
The Fed is ‘tone deaf’ if it hikes interest rates when a debt default and banking crisis are looming, top economist David Rosenberg says
Veteran economist David Rosenberg has warned the Federal Reserve against hiking interest rates any further, as he believes the inflation threat has faded and the US economy is already facing two big risks.
The banking turmoil that started with Silicon Valley Bank’s collapse in March remains unresolved, and First Republic’s failure and takeover by CEO Jamie Dimon’s JPMorgan this week has reignited worries about broader financial instability.
Moreover, political disagreement about raising the US government’s borrowing limit is fanning fears of a debt-ceiling crisis. Banking pressures and the prospect of a debt debacle are good reasons for the Fed to hold off on hiking rates, Rosenberg said.
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Bloomberg/Mohamed A. El-Erian
JPMorgan, First Republic and the Curse of the Second Best
Lots will be written on the rise and fall of First Republic Bank. Its customer service was legendary in the banking system, as was its list of rich clients with ample deposits and a healthy appetite for issuing jumbo mortgages to highly creditworthy borrowers. Yet it went from being admired to being seized by regulators and sold to another bank.
What emerged on Monday morning was far from perfect, despite weeks of discussions and posturing. What we have are US government institutions caught up in the policy implications of a “second best” world — that is, the repeated inability to come up with an optimal solution. What’s emerged will come with collateral damage and unintended consequences.
The Telegraph/Ambrose Evans-Pritchard
Half of America’s banks are potentially insolvent – this is how a credit crunch begins
The twin crashes in US commercial real estate and the US bond market have collided with $9 trillion uninsured deposits in the American banking system. Such deposits can vanish in an afternoon in the cyber age.
The second and third biggest bank failures in US history have followed in quick succession. The US Treasury and Federal Reserve would like us to believe that they are “idiosyncratic”. That is a dangerous evasion.
Almost half of America’s 4,800 banks are already burning through their capital buffers. They may not have to mark all losses to market under US accounting rules but that does not make them solvent. Somebody will take those losses.
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