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Both Warren Buffet and Jamie Dimon said in the days following the JPMorgan take-over of First Republic that the banking crisis is over, two pretty good sources on banking stress. It doesn’t mean there won’t be more bank failures—it seems inevitable there will be in the months ahead with the Fed tightening another quarter point last week putting several more under increased pressure. But it may mean from their vantage point banks with the interest rate exposure and those likely to feel the most pressure are small enough that consolidation is not going to cause contagion. It also means, however, that credit conditions will continue to tighten, slowing the economy. With the continued robust consumer activity and strong employment, however, that expected slowing appears slightly delayed and/or softened.
The banking credit tightening is certainly part of the story here because it may give the Fed room to stick with the plan to pause (in June) in order to observe whether recent rate moves are having the intended effect on inflation. The Federal Reserve survey of bank loan officers, out Monday, showed that credit conditions for U.S. business and households continued to tighten in the first months of this year.
In housing, the Mortgage Bankers Association (MBA) reported that mortgage credit availability fell in April to its lowest level since 2013, “matching the tightening in broader credit conditions stemming from recent banking sector challenges and an uncertain economic outlook,” Joel Kan, MBA Vice President and Deputy Chief Economist said.
MBA’s SVP and Chief Economist Mike Fratantoni perhaps summarized the current status well following the Fed statement last week: “We expect that the Fed will be ‘data dependent,’ and certainly would react to any renewed increase in inflation, but [the statement made by Chairman Powell] is consistent with a plan to pause rates at this level. Inflation is likely to trend down over the course of the year, particularly as weakness in the rental market begins to be reflected in the inflation numbers. In the near term, tighter credit conditions will slow the pace of economic activity. The housing sector is already operating under tight credit, so we don’t expect this headwind to outweigh the benefits from somewhat lower mortgage rates. The housing market is likely pulling the economy out of this slowdown, as it typically does.”