Bank Pain Is Just Getting Started, Ex-Fed President Kaplan Says

(Bloomberg) — The US regional banking crisis is far from over and the Federal Reserve should pause its rate hike campaign, according to former Federal Reserve Bank of Dallas President Robert Kaplan.

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“I’d prefer to do what’s called the hawkish pause, not raise but signal that we are in a tightening stance, because I actually think the banking situation may well be more serious than we currently understand,” Kaplan, whose career has also included time as a senior executive at Goldman Sachs Group Inc., said in a Bloomberg Television interview.

Kaplan went on to say that bank equities have been marked down solely because of their over-investment in the US treasuries, while the credit phase, which is “normally more serious,” is yet to unfold.

Just a day after Wall Street breathed a sigh of relief with the rescue of First Republic Bank, a drop in US regional lenders fueled renewed concern about financial stability. The S&P 500 fell 1.2% Tuesday in New York as US regional lenders PacWest Bancorp and Western Alliance Bancorp both tumbled at least 15%, on the eve of the US central bank’s decision.

Swap traders estimate that the Fed will raise borrowing prices by 25 basis points later Wednesday, raising the key rate to its highest level since 2007. Market pricing also suggests that the increase will represent the apex of the tightening cycle before slower growth forces the Fed to decrease rates later this year.

Read more: Fed Ready to Pause With One Last Hike: Decision-Day Guide

“It is more important to be able to sustain the current rate for an extended period of time, longer than the market thinks, than to get another 25-50 basis points and risk having to cut again. I think that will be very troubling,” said Kaplan, who left the Fed in 2021 after disclosures about his trading activity that drew criticism for potential conflicts of interest.

To combat inflation, the US need fiscal restraints and actions outside the authority of the Federal Reserve, “so I will pause here,” he added.

–With assistance from Kathleen Hays, Shery Ahn and Haidi Lun.