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Banks, banks, banks.

It has been quite a month, with fears over bank failures and potential systemic issues upsetting both fixed income and equity markets. We do not believe the problems plaguing banks will persist. The longer we go without another bank failure or deepening fears, the quicker this issue will resolve. The fear of a systemic banking crisis has far outweighed the actual magnitude of the current crisis to date. That being said, more failures and volatility could still occur, though the likelihood is getting lower the further we get down the road. 

Interest rates.

The Federal Reserve increased rates by a quarter point this past week, despite the recent banking situation. This hike could be the last one for a while, given the expected adjustments in the banking sector. Banks will likely restrict credit due to fears of continued banking instability, taking some of the inflation-fighting load off the Fed’s shoulders.

Recession potential.

There is little argument that the happenings in the banking sector and resulting tighter credit have moved the U.S. closer to recession in 2023. The silver lining? The main tool at the Federal Reserve’s disposal to deal with a recession is a change in interest rates. Now that the Fed has upped interest rates substantially over the past year, they have some breathing room to cut rates if a potential slowdown in the U.S. economy ensues.