London Daily

Focus on the big picture.
Thursday, Oct 09, 2025

Fed sees credit drawdown looming, shifts towards pause on rate hikes

Fed sees credit drawdown looming, shifts towards pause on rate hikes

Federal Reserve Chair Jerome Powell on Wednesday said banking industry stress could trigger a credit crunch with "significant" implications for an economy that U.S. central bank officials projected will slow even more this year than previously thought.

Banks either hit with sudden deposit outflows or worried about them may become steadily more reluctant to lend to businesses and households, a risk that prompted the U.S. central bank to reset its own expectations for monetary policy as it waits to see how far any contraction of credit may spread and how long it may last.

"We'll be looking to see ... how serious is this and does it look like it's going to be sustained," Powell said at a news conference following the conclusion of the Fed's latest policy meeting. "It could easily have a significant macroeconomic effect, and we would factor that into our policies."

The Fed's policy-setting committee raised interest rates by another quarter of a percentage point in a unanimous decision on Wednesday, lifting its benchmark overnight interest rate to the 4.75%-5.00% range.

But in doing so it recast its outlook from a hawkish preoccupation with inflation to a more cautious stance to account for the fact that changes in bank behavior may have the equivalent impact of the Fed's own rate hikes - perhaps just a quarter of a percentage point, but possibly far more than that.

Fed officials still feel that "some additional policy firming" may be needed, and they penciled in one more quarter-of-a-percentage-point rate increase by the end of the year.

But the more conditional language, replacing a promise of "ongoing increases," amounted to a seismic shift driven by the rapid failure this month of California-based Silicon Valley Bank (SIVB.O) and New York-based Signature Bank (SBNY.O), as well as the Swiss-engineered rescue of Credit Suisse.

U.S. officials across several agencies have been coping with the fallout, debating what new rules or regulations might be needed and whether changes are needed to the U.S. deposit insurance program - a systemwide backstop that failed to stem a deposit run at SVB.

The policy statement and Powell's remarks to reporters also showed Fed officials' rising attention to credit dynamics, something that could actually help them in the fight to tame inflation as long as any changes to the flow of loans does not become disorderly and that more bank failures are not in the offing.

"Financial conditions seem to have tightened and probably by more than the traditional indexes say because ... they don't necessarily capture lending conditions," Powell said. "The question for us is how significant will that be?"

Powell on Wednesday repeatedly voiced confidence in the stability of the U.S. financial system, noting that "deposit flows in the banking system have stabilized over the last week," and that SVB collapsed because "management failed badly," not because of generic weaknesses in the banking sector.

Still, the Fed chief said the collapse showed a breakdown of central bank supervision that needed to be fixed, and was being studied in a review due to be completed by May 1 under the direction of Michael Barr, the Fed's vice chair for supervision.

Yields on Treasury securities dropped following the release of the policy statement. The yield on the 2-year Treasury note , which is highly sensitive to Fed rate expectations, was down more than 21 basis points in the session.

U.S. stocks, which initially surged after the release of the policy statement, fell through the afternoon, with the benchmark S&P 500 index (.SPX) closing 1.6% lower. The dollar (.DXY) weakened against a basket of major trading partner currencies.


'SPOOKED'


The outcome of the policy meeting puts the Fed likely near the end of an aggressive series of rate increases that have dominated financial headlines for a year as the central bank tried to lower inflation from the 40-year-highs hit last summer to its 2% annual target.

Financial markets went a step further, betting that the Fed won't raise rates any further from here and will be reducing them by this summer.

"That's not our baseline expectation," Powell said in the news conference, adding that "the key is we have to have policies tight enough to bring inflation down to 2%," whether that comes from a higher Fed policy rate or market conditions that tighten on their own.


Still, the turmoil will likely take a toll on GDP growth and the economic outlook.

New economic projections from Fed officials see the unemployment rate rising nearly a full percentage point in the remaining months of the year, to 4.5% from the current 3.6%, with inflation falling only slowly and growth in gross domestic product downgraded from an already sluggish 0.5% to 0.4%.

"The Fed has been spooked by Silicon Valley Bank and other banking turmoil. They certainly point to that as a potential depressant on inflation, perhaps helping them do their job without having to raise rates as aggressively," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.

Newsletter

Related Articles

0:00
0:00
Close
France: Less Than a Month After His Appointment, the New French Prime Minister Resigns
Hungarian Prime Minister Viktor Orbán stated that Hungary will not adopt the euro because the European Union is falling apart.
Sarah Mullally Becomes First Woman Appointed Archbishop of Canterbury
Mayor in western Germany in intensive care after stabbing
Australian government pays Deloitte nearly half a million dollars for a report built on fabricated quotes, fake citations, and AI-generated nonsense.
US Prosecutors Gained Legal Approval to Hack Telegram Servers
Macron Faces Intensifying Pressure to Resign or Trigger New Elections Amid France’s Political Turmoil
Standard Chartered Names Roberto Hoornweg as Sole Head of Corporate & Investment Banking
UK Asylum Housing Firm Faces Backlash Over £187 Million Profits and Poor Living Conditions
UK Police Crack Major Gang in Smuggling of up to 40,000 Stolen Phones to China
BYD’s UK Sales Soar Nearly Nine-Fold, Making Britain Its Biggest Market Outside China
Trump Proposes Farm Bailout from Tariff Revenues Amid Backlash from Other Industries
FIFA Accuses Malaysia of Forging Citizenship Documents, Suspends Seven Footballers
Latvia to Bar Tourist and Occasional Buses to Russia and Belarus Until 2026
A Dollar Coin Featuring Trump’s Portrait Expected to Be Issued Next Year
Australia Orders X to Block Murder Videos, Citing Online Safety and Public Exposure
Three Scientists Awarded Nobel Prize in Medicine for Discovery of Immune Self-Tolerance Mechanism
OpenAI and AMD Forge Landmark AI-Chip Alliance with Equity Option
Munich Airport Reopens After Second Drone Shutdown
France Names New Government Amid Political Crisis
Trump Stands Firm in Shutdown Showdown and Declares War on Drug Cartels — Turning Crisis into Opportunity
Surge of U.S. Billionaires Transforms London’s Peninsula Apartments into Ultra-Luxury Stronghold
Pro Europe and Anti-War Babiš Poised to Return to Power After Czech Parliamentary Vote
Jeff Bezos Calls AI Surge a ‘Good’ Bubble, Urges Focus on Lasting Innovation
Japan’s Ruling Party Chooses Sanae Takaichi, Clearing Path to First Female Prime Minister
Sean ‘Diddy’ Combs Sentenced to Fifty Months in Prison Following Prostitution Conviction
Taylor Swift’s ‘Showgirl’ Launch Extends Billion-Dollar Empire
Trump Administration Launches “TrumpRx” Plan to Enable Direct Drug Sales at Deep Discounts
Trump Announces Intention to Impose 100 Percent Tariff on Foreign-Made Films
Altman Says GPT-5 Already Outpaces Him, Warns AI Could Automate 40% of Work
Singapore and Hong Kong Vie to Dominate Asia’s Rising Gold Trade
Trump Organization Teams with Saudi Developer on $1 Billion Trump Plaza in Jeddah
Manhattan Sees Surge in Office-to-Housing Conversions, Highest Since 2008
Switzerland and U.S. Issue Joint Assurance Against Currency Manipulation
Electronic Arts to Be Taken Private in Historic $55 Billion Buyout
Thomas Jacob Sanford Named as Suspect in Deadly Michigan Church Shooting and Arson
Russian Research Vessel 'Yantar' Tracked Mapping Europe’s Subsea Cables, Raising Security Alarms
New York Man Arrested After On-Air Confession to 2017 Parents’ Murders
U.S. Defense Chief Orders Sudden Summit of Hundreds of Generals and Admirals
Global Cruise Industry Posts Dramatic Comeback with 34.6 Million Passengers in 2024
Trump Claims FBI Planted 274 Agents at Capitol Riot, Citing Unverified Reports
India: Internet Suspended in Bareilly Amid Communal Clashes Between Muslims and Hindus
Supreme Court Extends Freeze on Nearly $5 Billion in U.S. Foreign Aid at Trump’s Request
Archaeologists Recover Statues and Temples from 2,000-Year-Old Sunken City off Alexandria
China Deploys 2,000 Workers to Spain to Build Major EV Battery Factory, Raising European Dependence
Speed Takes Over: How Drive-Through Coffee Chains Are Rewriting U.S. Coffee Culture
U.S. Demands Brussels Scrutinize Digital Rules to Prevent Bias Against American Tech
Ringo Starr Champions Enduring Beatles Legacy While Debuting Las Vegas Art Show
Private Equity’s Fundraising Surge Triggers Concern of European Market Shake-Out
Colombian President Petro Vows to Mobilize Volunteers for Gaza and Joins List of Fighters
×