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A graph comparing the US Federal Funds Effective Interest Rate with the year-on-year percentage change in inflation.

Luisa Vieira

The Graphic Truth: US interest rates vs. inflation

All eyes are on the US Federal Reserve, as it is set to announce Wednesday whether it’ll raise interest rates amid the recent banking turbulence.

The Fed’s decision will hinge on what central bankers think is a bigger priority: fighting inflation or stabilizing the financial sector following the recent collapses of Silicon Valley Bank and Signature Bank.

While it could stay the course in its inflation fight with another rate hike, the Fed is coming under growing pressure to ease investors’ anxieties by leaving interest rates be. But doing that risks giving in — temporarily, at least — to lasting inflation. The longer the Fed waits to control rising prices, the worse chance it has to reach its 2-3% inflation target without triggering a recession.

Also, high-interest rates are partly to blame for the recent financial turmoil on both sides of the Atlantic. Right-leaning critics argue that near-zero rates for too long made lending too cheap. Meanwhile, some on the left say that raising rates too quickly made borrowing too expensive, hurting the balance sheets of banks like SVB.

What do you think the Fed’s next move should be? Let us know here.

Lessons learned from the Silicon Valley Bank collapse | US Politics In :60 | GZERO Media

SVB political fallout ... not as dramatic as you think

Jon Lieber, head of Eurasia Group's coverage of political and policy developments in Washington, DC shares his perspective on US politics:

Who does Washington blame for the Silicon Valley Bank collapse?

After the largest bank failure in the US since the 2008 Financial Crisis, fears of a wider financial system failure prompted the Federal Reserve and the FDIC to take dramatic measures to contain more potential bank runs last weekend. This will have broad implications of the future of bank oversight, including capital requirements and what to do about uninsured deposits that will not be fully understood for years.

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Silicon Valley Bank collapse isn't the same as 2008 financial crisis | World In :60 | GZERO Media

Silicon Valley Bank collapse: Not 2008 all over again

Ian Bremmer shares his insights on global politics this week on World In :60.

With the Silicon Valley Bank collapse, is it 2008 all over again?

There's one very clear way that it's not, which is that it's not a big enough crisis for people to come together. And remember, after 2008, everyone understood that we needed to do everything possible to get the markets functioning, get trust in the system again, and avoid a great depression. Nobody's saying that right now. And it's not just because the US political system is more divided, it's also because people feel like it's fine to go after the "woke" banks. It's fine to go after the Trump era deregulation around the medium size banks. And everyone can point at their favorite villain while you don't really need to do a hell of a lot beyond the bazooka that Secretary Yellen threw at SVB and Signature Bank this weekend. So no, in that regard, it's very much not 2008 all over again. In some ways I'm happy about that and other ways I'm not.

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A customer is escorted into the Silicon Valley Bank headquarters in Santa Clara, California, on March 13, 2023.

REUTERS/Brittany Hosea-Small

SVB collapse: What happened and why it matters

Wondering about all the fuss over the collapse of Silicon Valley Bank? To get a handle on what happened and why it matters, we talked to Celeste Tambaro, managing director of Eurasia Group’s financial institutions practice. This interview has been edited for length and clarity.

GZERO: How did SVB get into trouble?

Celeste Tambaro: Although SVB was not a widely recognized name among US banks up until last week, the bank has been around for about 40 years and has built an important niche servicing investors and entrepreneurs in the emerging technology space. As you can imagine, given SVB’s positioning in the market, it experienced significant growth during the investment boom in private technology companies that occurred in the wake of the pandemic. This investment surge was fueled, in part, by continued low-interest rates and easy financial conditions during the late-2020/early-2021 period that made capital cheap and left the VC-funded start-up world flush with cash. This cash flowed into SVB in the form of deposits, or in banker’s terms, its funding base, which reached nearly $190 billion at its height. As a result, the bank was left with a lot of excess liquidity earning very low yields. In an effort to earn higher returns on this liquidity, SVB invested in a portfolio of around $120 billion longer duration U.S. Treasury bonds and fixed-rate mortgage securities. Ultimately, SVB was sitting on a highly concentrated bet on tech start-ups and a portfolio that was vulnerable if interest rates rose quickly.

And we all know what happened next. Russia invaded Ukraine, hyper-charging pandemic-driven global inflation, leading the Fed and Central Banks around the world to hike rates fairly aggressively in order to get ahead of the inflation curve. As a result, financial conditions have tightened, capital has become more expensive, and the growth outlook has become cloudier. This environment has weighed on investor sentiment in the tech space, so cash has not been flowing as freely in the start-up community, nor into SVB as new deposits. In addition to the negative impact that rising rates had on SVB’s deposit base, they also led to a decline in the value of SVB’s longer-duration portfolio as bond prices fell.

As deposit withdrawals picked up pace in February and early March, SVB’s management decided to shore up its liquidity and sell down $21 billion of its longer-dated securities portfolio. The problem was that any sale would be at a loss given the sharp move in interest rates. The sale took place and then things got worse. On Wednesday, management reported a realized loss of $1.8 billion on the sale – it was also attempting to raise an additional $2.25 billion of capital to bolster its balance sheet. But time was not on the bank’s side. SVB was quickly losing the confidence of the bond rating agencies, the market, and its key customers, and last Thursday the capital raise fell through. High-profile VC investors were sounding the alarm on the health of the bank, and liquidity concerns quickly shift to concerns that the SVB was insolvent. By Friday morning, a final frenzy to withdraw deposits, a so-called run-on-the-bank, occurred. Last-ditch attempts to sell the bank fell through, and by Friday afternoon SVB as we knew it was gone. That old familiar lesson yet again: Banks can go to zero if not run properly and the market and customers lose confidence.

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Silicon Valley Bank logo seen through broken glass.

REUTERS/Dado Ruvic

Yellen brings bazooka to stop SVB contagion

The US government on Sunday night announced measures to stop the collapse of Silicon Valley Bank from leaving 97% of its depositors holding the bag — and to avert another financial crisis (without spending taxpayer money).

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