BOSTON–Turmoil in the banking industry may not yet be over, according to Fidelity Investments, which said the Fed is in a “twilight zone” where it can't tame inflation without hurting financial stability.
According to an analysis by the company, higher-yielding money-market funds also threaten the banking sector.
"We believe we have now entered the 'twilight zone' of central banking where financial stability concerns start to impinge on policymakers' primary price stability objectives," a team led by Salman Ahmed said in Fidelity's global macro insights report for April 2023, the Wall Street Journal noted.
Fears Sparked
The report further noted Silicon Valley Bank sparked fears of a full-blown financial crisis in March when it collapsed after disclosing massive losses on its bond portfolio, with the value of its fixed-income holdings cratering over the course of the Fed's 13-month tightening campaign.
"While we expect the Fed and the ECB to continue the policy of tool separation in order to juggle both of these objectives – trying to convince markets there is no trade-off between them – given the role of markets and sentiment in policy transmission, this trade-off is alive and well and getting sharper," Fidelity said in its analysis.
Threat from Money Markets
Money-market funds are a further threat to the banking sector, according to Fidelity.
"As long as money market yields remain substantially higher than banking system deposit rates, deposit flight from smaller banks to larger banks or out of the banking system entirely might continue fueling further tightening or stress in the credit channel," the Fidelity strategists said, as quoted by the Journal. "The risk of further stresses emerging in the banking system, not just in the US but also in Europe, remains high in our view.”
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