(NewsNation) — The Silicon Valley Bank collapse may force the Federal Reserve to halt interest rate hikes.
Silicon Valley Bank and Signature Bank collapsed over the weekend after a bank run on Friday left the institution struggling to meet demand as customers withdrew cash. U.S. regulators took control of the bank in an effort to prevent financial collapse from spreading.
On Monday, President Joe Biden assured the country the failure of the two banks was not a sign of economic collapse and people should be assure they be able to get their money.
Biden also said the managers of the banks should be fired.
“If the bank is taken over by the FDIC, the people running the bank should not work there anymore,” he said, referring to the Federal Deposit Insurance Corp., the agency responsible for ensuring the stability of the banking system.
The FDIC insures bank accounts up to $250,000 and authorities assured customers they would have access to insured funds this week. Uninsured depositors will be given advanced dividends in coming days.
Prior to the collapse, the Fed had signaled intent to raise interest rates again in an effort to slow inflation. Halting rate increases would give the banks room to recover but could also fuel more inflation.
Some investors are calling for the Fed to make cuts to interest rates soon to stanch the bleeding. The wider expectation, though, is that the Fed will likely pause or hold off on accelerating its rate hikes at its next meeting later this month.
“At this point in time, depending on reactions in financial markets and eventual fallout on the overall economy, we wouldn’t rule out that the hiking cycle could even be over and that the next move by Fed officials may be lower not higher,” said Kevin Cummins, chief U.S. economist at NatWest.
That would be a sharp turnaround from expectations earlier last week, when many traders were forecasting the Fed would hike its key overnight interest rate by 0.50 percentage points at its next meeting. That would be after the Fed had just downshifted last month to an increase of 0.25 points from earlier hikes of 0.50 and 0.75 points.
The fear was that stubbornly high inflation would force the Fed to get even tougher, and investors were bracing for the Fed to keep hiking at least a couple more times after that.
Higher interest rates can drag down inflation by slowing the economy, but they raise the risk of a recession later on. They also hit prices for stocks, as well as bonds already sitting in investors’ portfolios.
While bank stocks have continued to drop over fears that other banks may face a similar collapse, other markets have seen an uptick as traders hope for a halt to rising rates.
The Associated Press contributed to this report.
