Similarly, it could make buyers of corporate bonds more risk-averse, lending on less favorable terms and at higher interest rate premiums relative to safe assets.That would change if the failures of SVB, Silvergate and Signature Bank (and troubles at several others) lead banks writ large to adopt greater caution, curtailing lending.Part of the reason rate hikes haven't slowed the economy more over the last year is that, while borrowing costs have been higher, credit has mostly remained readily available. Should the Fed continue its long-telegraphed tightening campaign to bring down inflation, or conclude that a seize-up in lending conditions triggered by banking problems will do the job for them?īetween the lines: Stress in the financial system tends to have powerful effects on growth.It is a fast-moving, highly uncertain situation in which Fed officials will have to rely more on gut instinct than backward-looking hard data.But now, there are early signs that banking troubles will constrict credit and damage confidence in ways that rate hikes alone have not. Why it matters: Just a couple of weeks ago, we mused about why a series of Fed hikes have not affected the economy more. That, at least, is the takeaway from financial market moves since the federal seizure of Silicon Valley Bank less than one week ago.regional banks - and maybe one really big European one - may well accomplish what the mighty Federal Reserve couldn't on its own: tightening the financial screws enough to slow down economic activity in a meaningful way.

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