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The American economy is facing two crisis situations. On the one hand, the war in Ukraine, companies withdrawing from the Russian market and losing millions, with soaring prices for surplus oil, and on the other hand, inflation and rising interest rates of interest. For American banks, which crisis is the worst, and which of the two men embodying them scares them the most?
The list of Western brands withdrawing from Russia is growing every day. By leaving this market, they lose millions. The banks are of course linked to these companies, just as they are linked to Russia, some notably via loans: and Russia is heading straight for bankruptcy.
But exposure to the (heavily sanctioned) Russian economy is minimal for US banks. In all, it would weigh only 15 billion dollars, according to data from Wells Fargo and the Bank for International Settlements, quoted by CNN. Or less than 0.1% of total assets in US banks.
This is therefore very little compared to galloping inflation in the United States with its 7.5% for the month of February. Thus, Jerome Powell, President of the Federal Reserve (Fed) will indeed announce, next Wednesday, an increase in interest rates, feared by the banks.
Why are the banks afraid of Jerome Powell?
An increase in interest rates is, in itself, not a bad thing for banks. In view of the Fed meeting (for which Powell had already announced two weeks ago that the increase in rates would be decreed), the prices of bank shares have been rising for the last two to three days. Different investment funds and exchange-traded funds, focused on financial sectors, such as the Financial Select Sector SPDR, called XLF, or the iShares focused on regional banks, are also increasing.
It is that with an increase in interest rates, the banks earn more money, because a loan will cost more, in short. But the banks are looking elsewhere, and see stagflation looming on the horizon. A complicated situation for the economy and the banks, which mixes inflation and the decline in growth.
But the rise in interest rates might have its role to play: without the “free” money (very low interest rates, which also have their share of the responsibility for inflation) available for the post- pandemic, this recovery would be severely curtailed, and growth might decline.
Putin
Skyrocketing energy prices (for which Putin however has his share of the responsibility) can further lead to stagflation: on the one hand, they can create a chain reaction which causes the prices of many goods to rise (for example because of transport and production, which require fuel and electricity), and on the other, prices can rise so much that consumers will stop buying certain goods, which results in lower growth. Their confidence index is already down sharply.
Thus, the banks fear that the Fed will raise the interest rate too quickly. They will then be a deterrent for customers and businesses that want to borrow money, which can also have an impact on the decline in growth, because there will be less investment, for example.
Between these different currents, the Fed will therefore have to find the right balance; its influence on oil prices in any case is non-existent. His verdict is expected next Wednesday.
