Markets with Madison: Silicon Valley Bank silver lining - Fed may halt hikes, Credit Suisse bailed out

The United States central bank should ditch its interest rate hikes while its banking system is at risk, a US chief economist says.

The failure of two US banks in the past week was a game-changing event that escalated uncertainty in the US economy, and the US Federal Reserve should not go ahead with more hikes to the Fed funds rate, Kevin Cummins, of NatWest Markets, told Markets with Madison.

The collapse of Silicon Valley Bank and Signature Bank, as well as US Government backstop measures to prevent more bank runs, led Cummins to change his forecast for the US Federal Reserve to pause its rate hike cycle next week, from a previous forecast increase of 50 basis points.

“With the latest bout of jitters in the market, and significant uncertainty that has come into the outlook, we think the Fed will pause,” Cummins said.

“This is one of the symptoms of tightening policy and higher interest rates, is that you start to see cracks in the system.”

The bank collapses also increased the likelihood of a recession in the US this year, he said.

The federal funds rate target range was currently 4.5 per cent to 4.75 per cent, following a 25 basis point hike in February. One year ago it was in a range below 1 per cent.

Traders were now pricing in lower rates, with the possibility of a pause. This week the two-year US treasury yield had its largest single-day decline since the 1987 stock market crash, falling below 4 per cent for the first time since September last year.

Investors dumped bank stocks this week, with Swiss bank Credit Suisse losing more than a quarter of its value in one day.

The sell-off sparked a bailout for the bank from the Swiss National bank, announcing overnight it would borrow up to CHF$50 billion (NZ$87m). Credit Suisse shares surged 19 per cent overnight.

However, Jarden global equity analyst Ben Stewart said big US bank stocks could be set to benefit as they saw an inflow of customer deposits seeking safety and were able to buy cheaper securities on the market.

The financial problems that sparked US regional banks to collapse were not present in New Zealand’s banking system, Morningstar analyst Nathan Zaia assured.

Speaking on Markets with Madison, he explained how much exposure Australian parent banks had to securities and how they hedged their risk.

Get investment analysis and insights from the experts on Markets with Madison every Monday and Friday with the NZ Herald.

Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.