The banking crisis might not be over yet

THE banking crisis may not be over. True, regulators seized First Republic Bank early on Monday (May 1) and sold it to JPMorgan Chase, the United States’ biggest bank. But other regional banks are still bleeding deposits. And the Federal Reserve is still putting pressure on the banks by raising interest rates, which tempts depositors to take out their money and put it in higher-yielding money market mutual funds.

The Federal Reserve – which announces its next rate decision on Wednesday – is in a bind. Chair Jerome Powell and the other rate-setters could ease the banking crisis by reversing course and cutting interest rates. But that would increase the risk of a renewed outburst of inflation, which the Fed is just beginning to bring under control. Or the Fed could stay the course on fighting inflation. But that would increase the stress on the banks.

The Fed is widely expected to raise the target for the federal funds rate another quarter of a percentage point this week. The question is whether it will raise rates again after that, keep them high for an extended period, or start cutting soon.