US banking chaos ‘definitely brings us closer’ to recession: Fed

The turmoil at First Republic and other embattled US regional banks “definitely brings us closer right now” to an economic recession, according to a top Federal Reserve official.

Minneapolis Fed President Neel Kashkari cited multiple “stresses” working their way through the banking sector, including a sharp deterioration in the commercial real estate market and the impact of rising interest rates as the most pressing causes for concern.

“What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch,” Kashkari said during a Sunday appearance on CBS’s “Face The Nation.”

“And then that credit crunch, just as you said, would then slow down the economy,” Kashkari said. “This is something we are monitoring very, very closely.”

Regional bank stocks staged a rally in premarket trading Monday after Bloomberg reported over the weekend that US officials are considering whether to expand an emergency lending facility aimed at helping embattled lenders withstand the crisis.

Still, the mid-sized banks have come under extreme pressure in the days since the collapse of Silicon Valley Bank and Signature Bank of New York sparked a run from worried depositors.

Fed Chair Jerome Powell and other top policymakers have scrambled to reassure Americans about the strength of the banking system.

Kashkari said the banking system is “sound” and well-equipped to handle further shocks.

“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,” Kashkari said.

Kashkari noted “such strains could then bring down inflation” without a need for more Fed interest rate hikes – depending on the extent of the slowdown.

The remarks were somewhat of a reversal for Kashkari, who has regularly called for more interest rate hikes to cool inflation in recent months.

Earlier this month, the Fed opted to hike its benchmark interest rate by another quarter percentage point despite the bank chaos.

At the time, Powell said officials “did consider” leaving the rate unchanged before moving forward with a hike.

He also suggested further hikes may not be necessary, with any slowdown caused by the bank crisis “being the equivalent of a rate hike or perhaps more than that.”

The Fed’s next meeting will take place on May 2-3.

At present, the market is pricing in an approximately 61% probability that Fed officials will leave rates unchanged and a roughly 39% chance of another quarter-point hike.