The banking crisis could have further legs to play out, according to Gold bug Peter Schiff.
What Happened: Bank of America Corp. BAC pays just 0.5% on savings accounts held with the bank and zero percent for checking accounts, Schiff noted. On the other hand, the fed funds rate is 5.25%, Schiff tweeted.
After maintaining interest rates at the extremely accommodative levels of 0-0.25% following the onset of COVID-19, the central bank began raising rates in March 2022. Since then, the Fed has raised rates at each of its meetings.
The fed funds rate is now at a 16-year high of 5-525%.
Schiff also noted that the real inflation rate was much higher. “The Fed destroyed the banking system. It’s insolvent and would collapse without governmental backstops,” he said.
At least three mid-sized, regional banks went under this year, as an asset maturity mismatch led to significant erosion in the value of the treasuries the banks held in their balance sheets. This triggered a liquidity crisis and, in turn, set in motion bank runs. They were then placed under the conservatorship of the Federal Deposit Insurance Corporation.
The government backstopped 100% of the deposits in a bid to protect the interest of depositors.
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Why It’s Important: The Fed is set to meet for its two-day monetary policy meeting on June 13 and June 14 and expectations for a temporary pause are increasing. The CME FedWatch Tool shows that the futures market is pricing in a 70.1% probability of a pause.
That said, a pivot is unlikely, according to most economists. Inflation remains notably higher than the central bank’s target. Certain segments of the economy have shown resilience. The U.S. economy outperformed expectations in May, adding 339,000 non-farm jobs, as revealed by the payroll data.
Critics warn that the Fed has been acting based on lagging indicators and that the real impact of the cumulative rate hikes will begin to show up eventually and lead the economy into a recession in the second half of 2023.
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Photo: Gage Skidmore on flickr