According to De Jong, the Fed is facing two major challenges. On the one hand, there is high inflation, which has been around for some time. “And to address this challenge, they’ve been raising interest rates for years,” he says. “And it will have to go even higher, they’ve said in the past.”
In addition, the Fed is also facing severe turmoil in the financial markets due to the collapse of the Silicon Valley Bank, which the US central bank is also dealing with. ‘And it is at odds with each other, because the problems at SVB were caused by the sharp rise in interest rates, given the positions they had,’ explains De Jong, who also points out that SVB had indeed taken too much risk.
Fed Chief Jerome Powell’s press conference also revealed that fighting inflation is a priority rather than fueling financial turmoil. “If the unrest continues,” De Jong continues. “Then the Fed has other tools to do something about it.”
supervision
In that same speech, Powell spoke of a tightening of banking oversight, which even Silicon Valley Bank lacked. De Jong: ‘The Fed is not only responsible for monetary policy, but also for the supervision of banks. And if the banks go bankrupt, you also have to check the regulatory authority.’
“42 billion dollars had never been seen before”
When asked, Powell admits that there were already concerns about Silicon Valley Bank and that regulators were already talking to the bank’s board about how to proceed. “But in the end they were completely amazed at how quickly deposits were withdrawn from that Silicon Valley bank just before the crash,” says De Jong. 42 billion dollars. It was never seen before, and that’s because nowadays you can take money away with just a few clicks of the mouse.’
Research
As a result, the Fed is now opening a supervisory inquiry; they still don’t fully understand how this could have happened. De Jong therefore expects changes to the regulation. “Smaller banks are monitored less closely than larger banks, and that’s about to change,” he says. “But I also think the enormous speed with which deposits can be withdrawn is a reason for change.”