The Fed has just recently announced it raised interest rates by 25 basis points, bringing the benchmark funds rate to a range of 4.75% to 5%.
At a Senate hearing on Wednesday, Treasury Secretary Janet Yellen said that if the US defaults on its debt, this would result in a massive loss of confidence in the US dollar, eventually leading to the loss of its status as the world’s global reserve currency.
“It would be a failure of the US government for the first time since 1789 to fail to pay bills that it incurred and it would cause a loss of confidence in the United States as the safest country, that our currency is a reserve country with currency used by the world,” said Yellen during a Senate hearing.
The recent banking crisis which was triggered in part by rising interest rates has resulted in changes at an unprecedented scale due to investors’ loss of confidence in the currency.
Not only have energy markets slumped to their lowest levels but the price of gold has hiked up to nearly $2,000.
A recent study revealed that nearly 200 American banks may have financial complications that have not yet been detected.
In Monetary Tightening and U.S. Bank Fragility in 2023, researchers contended that “there are 186 banks with a negative insured deposit coverage ratio”.
“Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.” the researchers explain.
The study published last week showed that the banks with troubled balanced sheets had exposure to $300 billion worth of insured deposits.
“The losses to the deposit insurance fund would total approximately $10 billion,” the study reads. “If the FDIC shut these banks following a run, there would be no funds left for the remaining uninsured depositors. In other words, the decision [by depositors] to run would have been a rational one.”
Too Soon to Tell?
Federal Reserve Chairman Jerome Powell said at a press conference earlier today that it is too soon to tell how the banking crisis will impact interest rates in the short or long term.
“Too soon to tell how banking fallout will impact rates,” Powell said, noting that the Fed increased interest rates by an additional 25 basis points on Wednesday.
He further said that central officials are not foreseeing rate cuts this year as their main priority remains on fighting inflation which is considered still too high.
“[Fed policymakers] don’t see rate cuts this year,” Powell said. “They just don’t. As always, the path of the economy is uncertain. Policy is going to reflect what happens rather than what we write down in the SEP [Summary of Economic Projections]. That’s not my baseline expectation [a rate cut],” he added.