According to hedge fund manager Bill Ackman, the United States economy could be on the verge of a “train wreck” as a result of the Federal Reserve’s ongoing fight against inflation and Treasury Secretary Janet Yellen’s decision to rule out “blanket” protection for bank deposits despite the worst financial crisis in a decade.
After Yellen’s comments that not all uninsured deposits will be safeguarded in future bank failures, Ackman, founder of Pershing Square Capital Management, raised concerns on Wednesday about a possible acceleration of deposit outflows from banks.
His remarks followed a quarter-point increase in interest rates by the Federal Reserve, which brought the benchmark funds rate to its highest level since 2007. This was the ninth consecutive hike in rates to curb inflation.
This decision was made more difficult by the spectacular failure of Silicon Valley Bank and two other banks earlier in March. The sharp increase in interest rates was a direct factor in the failure of the banks, and it was one of the contributing factors. Raising interest rates threatens to cause volatility within the financial sector.
The fallout from the failed banks was quickly contained by regulatory agencies, which included protecting all deposits held at the two institutions, including those holding funds that were more than the $250,000 insurance limit set by the FDIC. The Fed also introduced a new emergency backstop for lenders to assist them to satisfy deposit withdrawals under favorable terms.
The actions were meant to stem a flow of funds from small and regional U.S. lenders as customers raced to banks deemed too big to fail. However, smaller banks are still feeling the sting of the turmoil that is affecting the entire banking industry.
Fed policymakers have stated that it is too soon to say how the stress in the banking sector will affect the economy as a whole.
