President Joe Biden’s handling of the national economy “contributed” to the failures of Silicon Valley Bank (SVB) and Signature Bank, Sen. Tim Scott (R-S.C.) said in remarks during a congressional hearing on March 16.
Republicans tied elevated inflation and rising interest rates to the latest string of bank failures as Treasury Secretary Janet Yellen faced questioning from the Senate Finance Committee.
“Biden’s handling of the economy contributed to these bank failures,” Scott stated. “The president’s budget is further evidence of reckless tax and spending that will only exacerbate the highest inflation we’ve seen in 40 years.”
Sen. John Cornyn (R-Texas) told Yellen there have been suggestions that “this was an example of mismanagement at a time of higher interest rates and higher inflation.”
“I’ve previously said that I see important transitory influences at work, and I don’t anticipate that it will be permanent,” she said in June 2021.
Sen. Ron Johnson (R-Wis.) continued the inflation narrative by explaining that the annual consumer price index was at 1.4 percent when Biden took office. A dollar is worth 87 cents today, a trend that started “following the enactment of the partisan American Rescue Plan Act,” he added.
“I would say the No. 1 economic problem is our debt and deficit. And I would say that the top three causes of inflation ... are deficit spending, high energy costs, and supply dislocations,” he stated in an exchange with Yellen.
As Cornyn noted, Federal Reserve Chair Jerome Powell also had insisted that inflation was transitory. However, it wasn’t until November 2021 that he conceded that it was time to retire the term.
Yellen joined Powell soon after in no longer referring to inflation as transitory.
“I am ready to retire the word transitory,” she said at a December 2021 Reuters Conference. “I can agree that that hasn’t been an apt description of what we are dealing with.”
Once annual inflation reached 8.5 percent in March 2022, the U.S. central bank started its tightening campaign, a blend of boosting interest rates and reducing its balance sheet. Since then, the policy-setting Federal Open Market Committee (FOMC) have boosted rates by a total of 450 basis points, lifting the benchmark fed funds rate to its highest level since 2007.
Concerns Over Guarantees
Yellen was the first White House official to face Congress in the SVB and Signature Bank fallout, touting the administration’s “decisive and forceful actions to strengthen public confidence” in the national banking system.“I can reassure the members of the committee that our banking system is sound and that Americans can feel confident that their deposits will be there when they need them,” Yellen told the committee in her opening remarks. “This week’s actions demonstrate our resolute commitment to ensure that our financial system remains strong and the depositors’ savings remain safe.”
The Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. (FDIC) employed emergency measures on March 12 to plug a potential contagion event. The FDIC will cover all insured and uninsured deposits, while the central bank established a new lending facility that Yellen noted would “help financial institutions meet the needs of all of their depositors.”
But Sen. Mike Crapo (R-Idaho) expressed concern “about the precedent of guaranteeing all deposits and the market expectation moving forward.”
Sen. James Lankford (R-Okla.) asserted that the latest efforts by officials are encouraging depositors to transfer their funds to the big banks from community banks by saying that “we’re not going to make you whole, but if you go to one of our preferred banks, we will make you whole at that point.”
Many of the largest financial institutions have revealed that they see increased deposit inflows in the aftermath of SVB and Signature failures.
March FOMC Meeting
Markets are debating if the FOMC will continue to boost interest rates or hit the pause button at next week’s key policy meeting. Economists and market analysts say the Fed is stuck between an economic rock and a hard place: continue the inflation-fighting rate hikes that could negatively affect the banking system or pause the tightening, which could offer support to the banking system but threaten an inflation revival.Meanwhile, markets looked at the latest European Central Bank (ECB) policy announcements. The ECB’s Governing Council voted to increase the benchmark rate by 50 basis points and promised liquidity support if the financial system needs a cash injection.
