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The Fed’s inflation fight was a key factor in Silicon Valley Bank’s collapse, Jeremy Siegel said.
The Wharton professor warned more interest-rate hikes could cause other companies to crumble.
Siegel flagged the growing risk of recession if the Fed keeps raising rates.
Blame the spectacular collapse of Silicon Valley Bank on the Federal Reserve, Jeremy Siegel says.
“Make no mistake about one of the prime reasons for SVB’s implosion: Fed shrapnel killed this bank and may send the economy into recession in the process,” the Wharton professor said in a Fortune column he coauthored with two Yale academics, Jeffrey Sonnenfeld and Steven Tian.
Inflation spiked to 40-year highs last year, spurring the Federal Reserve to hike interest rates from nearly zero to upwards of 4.5% over the past 12 months. Higher rates increase borrowing costs and encourage saving over spending, which typically pulls down asset prices, saps demand, and increases the risk of a recession.
One of SVB’s key mistakes was investing its deposits in long-duration bonds, which plunged in price as interest rates rose. Surging rates have also weighed on the valuations and fundraising potential of lossmaking, VC-backed companies — a big chunk of SVB’s customer base.
When SVB’s customers began withdrawing their money in droves last week, the lender found itself short of cash. The Federal Deposit Insurance Corp. took control of the bank on Friday, and guaranteed SVB customers’ deposits on Sunday.
“This crisis is more evidence that the Fed has gone too far and might steer the economy not just off the highway, but right off a cliff,” Siegel and his coauthors said.
They warned that if the US central bank hikes rates by 50 basis points in March, that would increase the risk of more SVB-type implosions.
“Continuing to tighten monetary policy in this environment of bank blowups and declining consumer and business confidence is a surefire recipe for disaster,” they said, adding that the Fed’s hikes have caused “collateral damage and general carnage.”
Siegel, Sonnenfeld, and Tian slammed the Fed for continuing to wage war on inflation, when they see evidence of “pervasive disinflation across virtually the entire economy.”
The trio pointed to high mortgage rates slowing construction of new houses and the prices of many commodities plunging by over 70% from their peaks last year. They also noted the sharp declines in shipping and cargo rates as consumers’ pandemic savings …read more
Source:: Business Insider