The economy is performing a high-stakes juggling act
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.
- Inflation is still undermining consumers.
- Layoffs are pummeling the tech sector.
- And more interest rate increases may be on the way, though likely less than believed last week.
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."