Fed official warns banking crisis 'brings us closer' to recession (2024)

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Minneapolis Fed President Neel Kashkari said that the recent banking crisis that led to the shuttering of Silicon Valley Bank and Signature 'definitely' edge the U.S. closer to a recession.

'It definitely brings us closer right now,' Kashkari told CBS 'Face the Nation' on Sunday.

He said the banking crisis could lead to a credit crunch, or decrease in the amount of money banks have to lend.

'What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch. And then that credit crunch, just as you said, would then slow down the economy,' he said.

Kashkari said that Fed officials are monitoring the fallout from the crisis 'very, very closely' and it's too early to determine whether it will have any impact on inflation and the next Fed meeting.

The Federal Reserve raised its key interest rate a quarter point on Wednesday to 4.75-5 percent, the highest rate since 2007.

He said the banking crisis could actually draw down inflation and thus prevent the Fed from raising rates even higher.

'On one hand, such strains could then bring down inflation, so we have to do less work with the federal funds rate to bring the economy into balance,' he said.

Kashkari did say the banking system has the 'full support' of the Federal Reserve.

'The banking system has a strong capital position and a lot of liquidity and has the full support of the Federal Reserve and other regulators standing behind it,' he said. 'The U.S. banking system is resilient, and it's sound.'

Kashkari's words came after the Financial Stability Oversight Council held a closed meeting after Fed data showed customers withdrew $100 billion from banks in the week ending March 15.

But Kashkari noted that money movements from smaller banks to bigger institutions like JP Morgan have slowed in recent days, which he deemed a sign of restored faith.

'There are some concerning signs, the positive sign is deposit outflows seem to have slowed down. Some confidence is being restored among smaller and regional banks,' he said.

The frightening bank saga has transpired over the course of just two weeks, and has spurred the demise of now four major banks - Silvergate, Silicon Valley Bank, Signature, and, most recently, major global lender Credit Suisse.

The consecutive collapses have sent shockwaves throughout the sector, while leading to liquidity crunches for other regional banks such as First Republic, as concerned citizens continue flock to branches to withdraw from their accounts.

Experts are now expressing confidence that the banking sector can withstand the shocks - saying the recent volatility serves as misleading - while others have warned they may still trigger a global catastrophe.

The San Francisco lenders' shares, as have dozens of others', have taken a nosedive over the past ten days, putting pressure on the Fed to put a pause on a series of rate hikes to ensure financial stability.

Other 'emergency lifelines' offered by regulators have included a $54billion buyout of New York-based Suisse by the Swiss government, and a $30billion bailout for First Republic from a coalition of big banks including JPMorgan and Goldman Sachs.

Such measures, experts have maintained, have all but annihilated any risk of contagion within the banking industry, whose questionable risk management has been cited as one of the main contributors to the previous financial crisis.

The current crisis, however, comes as banks across the world are adjusting to a steep surge in interest rates leveled to address pronounced economic inflation seen since the COVID-19 pandemic.

Used to years of low-cost borrowing thanks to ultra-low interest rates maintained by central banks around the world, lenders like SVB and Credit Suisse have struggled to manage their portfolios.

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