NEW YORK–A former chairman of the FDIC is calling on the Federal Reserve to stop raising interest rates—and she’s citing the failed Silicon Valley Bank as one reason why.
Sheila Bair, who headed the federal bank regulator during the 2008 financial crisis, said the failure of the bank is the result of “stress” the Fed is causing.
“The Fed needs to hit pause and assess the full impact of its actions so far before raising short rates further,” Bair told CNN. “If they paused, it would have a settling effect on the markets.”
As CUToday.info has been reporting, most analysts have been expecting the Federal Open Markets Committee to boost rates another half-point when it meets later this month as it continues its war on inflation. But Bair told CNN a hike of that size would not be “well advised,” given the Silicon Valley Bank collapse.
Higher borrowing costs have hit the tech industry—which was the core of Silicon Valley Bank’s customer base—and are also undermining the value of the Treasury bonds that banks rely on as a central source of capital, Bair said.
“When money gets tighter, financial assets lose value. That has to be carefully managed,” said Bair in the interview.
$620 Billion in Unrealized Losses
CNN noted that as of the end of 2022, U.S. banks were sitting on $620 billion in unrealized losses, according to FDIC data. Those assets could lose further value if the Fed keeps raising rates.
In the case of Silicon Valley Bank, it locked $1.8 billion of losses on bonds it held last week as it rushed to sell securities in a bid to shore up its balance sheet. Many analysts have said the bank had sufficient capital, but the rumors that led to a run on deposits were too much for the bank to handle, especially after customers withdrew $42 billion in just one day.
“This was a bank run,” Bair told CNN. “From what I can tell, the assets are good quality, if held to maturity. But, humans are humans.”
Goldman Sachs Dials Back Forecast
Separately, Goldman Sachs told its clients over the weekend that “in light of the stress in the banking system,” it no longer expects the Federal Reserve to deliver a rate hike next week. Goldman, however, still expects rate hikes of a quarter point in the Fed’s May, June and July meetings, though it added there is “considerable uncertainty about the path,” according to CNN.
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