Interest rates, on a wild upward ride for most of the last two years, may soon be leveling off as the economy moves into 2024.
“We’re likely at or near the peak of where we need to be in terms of having a sufficiently restrictive stance of monetary policy that will sustainably bring inflation down to 2%,” Michael Barr, the vice chair for supervision at the Federal Reserve, remarked during a podcast hosted by the news service Bloomberg.
“I think the recent economic readings reinforce my view that that is probably correct,” Barr added, noting that the danger of having too tight a monetary policy was now being balanced off against the risk of not doing enough to curb price inflation.
In separate remarks delivered before the Senate’s Committee on Banking, Housing, and Urban Affairs, Barr, who was appointed to his post by President Biden in 2022, also declared that the nation’s banking system “is sound and resilient.”
Stress on the system recorded earlier this spring has receded, continued Barr, “and banking organizations continue to report capital and liquidity ratios above minimum regulatory levels.”
At the same time, he noted, “Earnings performance has remained solid and in line with pre-pandemic levels, despite recent pressure on net interest margins.”
Described earlier this year by the New York Times as the “man making big banks tremble,” Barr remarked that the failures of the First Republic Bank, Signature Bank, and Silicon Valley Bank in March was likely due to “excessive rate risk in their long-duration assets and an over-reliance on uninsured deposits.”
“While the three failed banks were extreme cases, there are other banks that invested heavily in fixed-rate, long-duration assets when long-term interest rates were low,” Barr continued.
Those banks have since “recorded sizable declines in the fair value of those assets as interest rates have increased, putting pressure on tangible capital.”
Even in the face of such challenges, Barr noted “lending has continued to grow this year,” while adding that loan delinquency rates have remained low as banks have “increased credit loss provisions to mitigate potential future losses.”
By Garry Boulard