Fed's Kashkari says bank stress could bring the US closer to recession via a credit crunch

Federal Reserve Federal Reserve The Federal Reserve System, more commonly known as the Fed, represents the central banking system of the United States. Like other central banks globally, the Fed is responsible for monetary policy, in this case in the US.The Fed is one of the most watched and followed entities for forex traders, given its material impact on the US dollar. Founded initially in 1913, the Fed was created to perform a wide range of functions. This includes stabilizing and maintaining flexible monetary policy in the The Federal Reserve System, more commonly known as the Fed, represents the central banking system of the United States. Like other central banks globally, the Fed is responsible for monetary policy, in this case in the US.The Fed is one of the most watched and followed entities for forex traders, given its material impact on the US dollar. Founded initially in 1913, the Fed was created to perform a wide range of functions. This includes stabilizing and maintaining flexible monetary policy in the Read this Term Bank of Minneapolis President Neel Kashkari spoke in an interview with US media, CBS, on Sunday.

He said that the stresses in the banking sector and the possibility of a subsequent credit crunch brings the US closer to recession,

• "What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch. That credit crunch ... would then slow down the economy. This is something we are monitoring very, very closely."
• "It definitely brings us closer"

More on the potential for a credit crunch:

• "We've seen that capital markets have largely been closed for the past two weeks. If those capital markets remain closed because borrowers and lenders remain nervous, then that would tell me, okay, this is probably going to have a bigger impact on the economy,"

And, looking ahead for policy moves:

• "So it's too soon to make any forecasts about the next FOMC meeting."

On US banks:

• "There are some concerning signs. On the positive side is deposit outflows seem to have slowed down. Some confidence is being restored among smaller and regional banks"

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If you are wondering what a credit crunch is, in a nutshell explanation:

• a credit crunch is a sudden and severe shortage of credit or loans in the financial system
• it usually stems from a loss of investor confidence, a decrease in the availability of credit, or a sharp increase in interest rates (or a combination of those)
• it occurs when banks and other lenders become reluctant, or unable, to lend money to borrowers, even those who have good credit histories, this can cause a sharp contraction in economic activity

I posted a couple of weeks ago the warning of a crunch from Goldman Sachs resulting from US bank collapses. ICYMI:

• "Small and medium-sized banks play an important role in the US economy,"
• "Any lending impact is likely to be concentrated in a subset of small and medium-sized banks."

GS analysts assume that small banks with a low share of FDIC-covered deposits will reduce new lending by 40%

• other small banks will reduce new lending by 15%
• leading to a 2.5% drag on total bank lending

GS conclude that:

• the effect of tightening would have the same impact on demand growth as would an interest rate hike of 25 to 50 basis points