Stress in the banking sector is being closely monitored for its potential to trigger a credit crunch, a U.S. Federal Reserve policymaker said on Sunday, as a European Central Bank official also flagged a possible tightening in lending.
Shares in Germany's largest bank fell 8.5% on Friday and the cost of insuring its bonds against the risk of default jumped sharply and the index of top European bank sharesThe sudden spike in tensions for banks has raised questions about whether major central banks will continue to pursue aggressive interest rate hikes to try to bring down inflation, and prompted some to speculate on when rates will start to fall.
"Major central banks, including the Fed and the ECB, should make a joint statement that any further rate hike is off the table at least until stability has returned to the financial markets," Nielsen said in a note on Sunday. "There are some concerning signs. On the positive side is deposit outflows seem to have slowed down. Some confidence is being restored among smaller and regional banks," Kashkari said.
"We've seen that capital markets have largely been closed for the past two weeks. If those capital markets remain closed because borrowers and lenders remain nervous, then that would tell me, okay, this is probably going to have a bigger impact on the economy," Kashkari said, adding: "So it's too soon to make any forecasts about the next FOMC meeting."
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