Mar 14, 2023 - Economy

The economy is performing a high-stakes juggling act

Illustration: Annelise Capossela/Axios

These days the economy resembles a unicycling juggler — and it just got yet another ball to keep in the air.

Why it matters: The sudden collapse of Silicon Valley Bank and New York's Signature Bank comes at a precarious time for the economy as it grapples with myriad challenges.

The big picture: All of it is intertwined.

  • Inflation is driving rate increases, which ravaged SVB, which briefly caused investors to panic-sell regional bank stocks on Monday, fearing that depositors were heading for the exits.

The good news: Bank customers seem to have remained relatively calm despite talk of a social-media-fueled meltdown, as the U.S. government took steps to ensure the safety of deposits.

  • Regional bank stocks stopped plummeting, and even rebounded Tuesday, as investors showed tentative confidence in the sector's stability.
  • And there was some good news with February's inflation data: The price of food at home rose only 0.3% in the month, compared with January, marking its lowest monthly increase since April 2021.

Yes, but: The banking sector isn't out of the woods.

  • Moody's on Tuesday downgraded the entire sector's outlook from stable to negative.

What to watch for: How the Fed responds.

  • Anything looking like a systemic financial crisis is likely to give the Fed pause on raising rates too quickly.
  • But inflation remains a pervasive threat.

The bottom line: "At face value, the ongoing strength of inflation presents a dilemma for the Fed as it focuses on maintaining financial stability," Capital Economics U.S. economist Andrew Hunter wrote Tuesday.

  • "But even if the current crisis ends up being resolved relatively quickly, we suspect the resulting tightening in credit conditions will still do lasting damage to the economy."
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