Debt default, banking crisis key concerns for US economy, says economist David Rosenberg

David Rosenberg

Federal Reserve officials are tone deaf and are not paying enough attention to the ongoing banking crisis in the country, prominent US economist David Rosenberg has said, criticising the central bank for its rate hike cycle.

The comments come as more regional, smaller banks seem to be on the brink in the United States despite the Fed Reserve’s assurances that the worst of the banking crisis was over.

“We have a possible debt default on our hands and a spreading bank crisis, sorry Jamie, this doesn’t look over. Focused on an inflation rate that is actually LOWER now than it was in July 2008. These guys are tone deaf.” Rosenberg tweeted a day ahead on Fed Reserve meeting.

Rate hike ripples

On May 3, the Federal Open Market Committee (FOMC), headed by chairman Jerome Powell, raised interest rates by another 25 basis points. This was the 10th consecutive rate hike in one of the most aggressive rate hike cycles of the Fed’s recent history.

The latest hike boosted borrowing costs from almost zero in March 2022 to about 5.25 percent, the biggest jump since the 1980s. The central bank has moved aggressively to combat surging inflation, which hit a 40-year high of 9.1 percent last summer.

Higher rates encourage saving and make debt costlier, which can tame the pace of price increase but they can also dampen demand, pull down asset prices, and elevate the risk of a recession. Since the cost of borrowing continues to escalate rapidly in a high-rate environment like today.

Also Read: Berkshire's Charlie Munger predicts imminent trouble for US commercial property market

Banking crisis far from over

The FOMC meet concluded with Powell saying that the future trajectory of the rate hikes would entirely depend on the incoming data and the Fed “will take data depended approach to determine extent of further rate hikes”.

“The same Fed chairman who once told us the Fed wasn’t thinking about thinking about raising rates is now saying that he has no intention of cutting rates.  Doh!” Rosenberg said in a tweet on May 4, highlighting the challenges facing the Fed.

“The carefully nuanced language in the Fed press statement is eerily similar to all the others in the past that marked the end of the tightening cycle. The subtle change in the verbiage that always marks the rates peak.”

Also Read: Top 5 voices on US Federal Reserve rate hikes and its impact

The tweets sum up the challenges the Federal Reserve faces in balancing inflation and growth in 2023.

Several other economists are also of the view that the banking turmoil that started with the collapse of Silicon Valley Bank in March remains unresolved.

First Republic's failure and takeover by JPMorgan this week has reignited worries about broader financial instability.

Moreover, political disagreement about raising the US government's borrowing limit is fanning fears of a debt-ceiling crisis. A possibility that has also been discussed by treasury secretary Janet Yellen.

Banking pressures and the prospect of a debt debacle are good reasons for the Fed to stay focused on the task at hand and ensure that nothing else breaks and goes out of hand like the collapse of the Silicon Valley Bank.

It remains to be seen how markets react to the recent hike, while the US Federal Reserve continues on its path of achieving maximum employment, price stability and an inflation rate of 2 percent.