As US banking stress rises, here’s what investors should be looking at

The Fed’s mopping up of market liquidity has put stress on banks. While the tightening is set to end, market concerns remain

Investors can gauge temperatures by tracking bank deposit shifts and indicators such as the FRA-OIS spread and US Conference Board’s leading credit index

3-MIN READ3-MIN

A rate announcement on a screen as traders work on the floor of the New York Stock Exchange on March 22. Markets expect rates to drop after a final increase in May but inflation, jobs and economic data may well force the Fed to tighten credit further. Photo: AP

Marcella Chow

Marcella Chow, executive director, is a global market strategist at J.

Published: 9:30pm, 31 Mar 2023

Over the past year, stubbornly high inflation has forced the US Federal Reserve into arguably its most acute monetary tightening cycle yet. Since March last year, the US central bank has increased its interest rates by an aggressive 4.75 percentage points – compared to the average rate tightening cycle of 3.02 percentage points over 21 months.

This drastic pickup in interest rates has led to a significant tightening in lending standards and a sharp downward reassessment of asset prices. At the end of February, the US M2 broad money supply – a measure of money circulating in the economy – shrunk by 2.35 per cent year on year, its largest decline since data was published in the 1960s. As a result, fragilities have started to appear in the economy.

As liquidity has become scarce, turbulence has emerged in the US banking sector. So far, the Federal Reserve, US Treasury and Federal Deposit Insurance Corporation (FDIC) have managed to ease concerns by providing new liquidity provisions.