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Federal Reserve Says Higher Rates Could Exacerbate Stress For Banks, But What of Bitcoin?

AA News - Andrew Throuvalas 2023-06-01 09:00

Historically high-interest rates in the United States could “exacerbate” stress in an already shaky banking system, said a member of the Federal Reserve’s Board of Governors on Wednesday. 

The governor also hinted that the central bank might decide not to raise its benchmark interest rate at the next Federal Open Markets Committee (FOMC) meeting, which could have implications for Bitcoin’s price.

Rising Rates and Mounting Debt

Fed Governor Philip N. Jefferson remarked on the U.S. financial system’s economic outlook during a speech at the 22nd Annual International Conference on Policy Challenges for the Financial Sector in Washington D.C.

While claiming that the banking system had “stabilized” following multiple bank runs and foreclosures in March, the governor recognized the risks associated with elevated short-term interest rates, which are “5 percentage points higher than they were a little over a year ago.”

As Jefferson explained, the effects of monetary policy work with “long and variable lags,” which aren’t fully accounted for in one year alone. Throughout the rest of the year, he predicts slow growth amid “heightened uncertainty” and a decline in household savings and tight financial conditions. 

Though the governor doesn’t predict a recession, he claimed that the combination of low earnings and high rates could “test the ability of businesses to service debt. “ 

“In addition… higher interest rates could further exacerbate stress at banking organizations, especially those that are highly exposed to longer-duration assets and have a relatively high ratio of uninsured deposits to total deposits,” he continued. 

Will The Fed ‘Skip’ A Rate Hike?

When Silicon Valley Bank (SVB) experienced a bank run in March, it occurred after the company disclosed a $1.8 billion realized loss on its long-duration bonds.

Insurance coverage ultimately didn’t matter for SVB, as the Federal Reserve, Treasury Department, and FDIC agreed at the time to fully bail out all depositors as a “systemic risk exception.”

Critics of the move noted how the central bank’s rescue activity reversed much of its progress in attempting to withdraw liquidity from the economy, which could contribute to inflation for assets like Bitcoin again. 

The governor floated the idea that the Fed might “hold” its policy rate constant at a “coming meeting,” but that this shouldn’t be interpreted as the Fed reaching “the peak rate for this cycle.”

“Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming,” he concluded.

Rising rates drove Bitcoin and stock down throughout 2022, making an approaching peak rate potentially bullish for the asset. That said, analysis suggests that Bitcoin may not be as affected by rate hikes as it was last year.

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