President Joe Biden’s handling of the national economy “contributed” to the failures of Silicon Valley Bank (SVB) and Signature Bank, Sen. Tim Scott (R-S.C.) said in remarks in front of Treasury Secretary Janet Yellen.
Senate Republicans tied elevated inflation and rising interest rates to the latest string of bank failures during Secretary Yellen’s hearing before the Senate Finance Committee on Thursday.
“Biden’s handling of the economy contributed to these bank failures,” Scott stated. “The president’s budget is further evidence of reckless tax and spending that will only exacerbate the highest inflation we’ve seen in 40 years.”
Sen. John Cornyn (R-Texas) told Yellen that there have been suggestions “this was an example of mismanagement at a time of higher interest rates and higher inflation.”
He alluded to Yellen’s previous committee comments almost two years ago when she had dismissed inflation worries.
“I’ve previously said that I see important transitory influences at work, and I don’t anticipate that it will be permanent,” she said in June 2021.
Sen. Ron Johnson (R-Wis.) continued the inflation narrative by explaining that the annual consumer price index was at 1.4 percent when Biden took office. One dollar is now worth 87 cents today, a trend that started “following the enactment of the partisan American rescue plan act,” he added.
“I would say the number one economic problem is our debt and deficit. And I would say that the top three causes of inflation … are deficit spending, high energy costs, and supply dislocations,” he stated in an exchange with Yellen.
Biden had rejected persistent price pressures in the first year of his term, saying in December 2021 that inflation reached “the peak” and would decline rapidly.
As Cornyn noted, Federal Reserve Chair Jerome Powell had also insisted that inflation was transitory. However, it was not until November 2021 that he conceded that it was time to retire the term.
Yellen joined Powell soon after in no longer referring to inflation as transitory.
“I am ready to retire the word transitory,” she said at a December 2021 Reuters Conference. “I can agree that that hasn’t been an apt description of what we are dealing with.”
Once annual inflation reached 8.5 percent in March 2022, the U.S. central bank started its tightening campaign, a blend of raising interest rates and reducing the balance sheet. Since then, the Federal Open Market Committee (FOMC) pulled the trigger on rate hikes totaling 450 basis points, lifting the benchmark fed funds rate to its highest level since 2007.
As the Fed increased rates, the bond market suffered significant volatility and erased valuations. Since SVB held plenty of long-term bonds to support its high deposit rates, the financial institution’s investments endured enormous losses.
Concerns Over Guarantees
The U.S. banking system “remains sound” and Americans “can feel confident” about their deposits, said Treasury Secretary Janet Yellen.
Yellen was the first White House official to face Congress in the fallout of the collapsing SVB and Signature Bank, touting the administration’s “decisive and forceful actions to strengthen public confidence” in the national banking system.
“I can reassure the members of the committee that our banking system is sound and that Americans can feel confident that their deposits will be there when they need them,” Yellen told the Senate Finance Committee in her opening remarks. “This week’s actions demonstrate our resolute commitment to ensure that our financial system remains strong and the depositors’ savings remain safe.”
The Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) employed emergency measures on Sunday to plug a potential contagion event. The FDIC will cover all insured and uninsured deposits, while the central bank established a new lending facility that Yellen noted would “help financial institutions meet the needs of all of their depositors.”
But Sen. Mike Crapo (R-Idaho) expressed concern “about the precedent of guaranteeing all deposits and the market expectation moving forward.”
Sen. James Lankford (R-Okla.) asserted that the latest efforts by officials are encouraging depositors to transfer their funds from community banks to the big banks by saying that “we’re not going to make you whole, but if you go to one of our preferred banks, we will make you whole at that point.”
Many of the largest financial institutions have revealed that they see greater deposit inflows in the aftermath of SVB and Signature Bank failures.
Christian Sewing, the Deutsche Bank AG CEO, revealed at Morgan Stanley’s European Financials Conference on March 15 that the bank saw higher deposit inflows. In addition, Charles Schwab CEO Walter Bettinger also confirmed that the company received $4 billion in new deposits.
March FOMC Meeting
Markets are debating if the FOMC will continue raising interest rates at next week’s key policy meeting or hit the pause button. Economists and market analysts aver that the Fed is stuck between an economic rock and a hard place: continue the inflation-fighting rate hikes that could negatively affect the banking system or pause the tightening that could offer support to the banking system but threaten an inflation revival.
The CME FedWatch Tool shows that investors are mostly betting on a quarter-point jump.
Meanwhile, markets looked at the latest European Central Bank (ECB) policy announcements. The ECB’s Governing Council voted to increase the benchmark rate by 50 basis points and promised liquidity support if the financial system needs a cash injection.
“The euro area banking sector is resilient, with strong capital and liquidity positions,” the ECB said in a statement. “The ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”