More ominous clouds are gathering over the US economy. Growth in output slowed by more than expected in the first few months of the year. It decelerated to 1.1% on an annual basis with retail sales far less upbeat than first thought. A darkening picture of consumer confidence has increased concerns about lower spending ahead.
A sign of things to come for the US?
Shoppers are set to tighten purse strings even further. The US Conference Board Consumer Confidence Index, which shows sentiment about the months ahead, has dropped to the lowest level since July.
With Americans becoming a lot more pessimistic about how the jobs market will look later this year, spending plans are being scaled back. The Federal Reserve (Fed) warning of a mild recession ahead has also added caution to the air.
Is there still concern for banks?
We've already seen the collapse of Silicon Valley Bank this year and now the fragility of First Republic Bank is in focus.
The systemic risk to the banking system is still considered to be low. However, the expectation is that other banks will tighten up the lending purse strings to keep more cash on hand in case there's a sudden deposit withdrawal.
But if lending is constrained and consumers and companies find it harder to get loans, this could further curtail economic activity. This in turn could push up the risks of tougher recession, and the possibility that more bad loans could pile up at the banks.
What could the Fed do next?
The Fed is still in a jam. Inflation is proving sticky with core prices, excluding volatile energy and food costs, staying stubborn. It doesn't want the spiral of prices to keep eroding purchasing power, which will also be damaging economically. But at the same time, it will want to avoid any further 'breakages' prompted by the rapid hiking cycle.
There is a chance the Fed may still raise rates again in May, but the repercussions of the banking turmoil will be playing on policymakers' minds. So, the pause button might well be pressed quite swiftly to enable them to assess the lag effect of rate rises and the potential tightening of lending.
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