The Federal Reserve didn’t back off on its promise to continue raising the prime rate to help drive down inflation. But it’s a good bet that Fed chairman Jerome Powell and company might’ve preferred going higher than a quarter percentage point.
Pressure came from all sides and likely even from the White House to keep the latest hike to a mere quarter-point, following the collapse of Silicon Valley Bank (SVB). That’s despite inflation still hovering above 6%, steep layoffs in tech and a slowdown in construction. The feds’ goal remains to bring inflation close to 2%, though some analysts argue the Fed should readjust their expectations and settle for a more realistic 3%-4% rate.
SVB isn’t the only bank holding on to a lot of wrecked treasury bills and other financial liabilities. All that’s stopping antsy venture capitalists from setting off another bank run is the feds’ willingness to bail out more banks. At least that’s what bigger banks think Treasury Secretary Janet Yellen will do once the next domino falls. Yellen’s parameters for what constitutes a “too big to fail” bank were as clear as mud.
Fannie Mae is the latest big player to predict “turmoil” to come in the banking sector and an unavoidable recession to boot. Banks worried about liquidity and a stalled housing market are sure to further tighten credit limits, Fannie Mae analysts predict.
The good news? Most CFOs saw this storm coming
So what should CFOs and businesses that don’t qualify for a bailout expect over the coming year? You guessed it – inflation. Maybe higher than 6% – it’s anyone’s guess.
Finance chiefs offering their takes on the economy and the future of their businesses consistently ranked inflation as their No. 1 worry last year. CFOs could see the end effect of Washington’s spending spree on markets dating back to the start of the COVID pandemic.
Companies that need to borrow can expect higher rates for at least the next 12 months. Banks can afford to be picky – they’ll be looking at would-be lenders’ financials and credit ratings a lot more closely.