Column-Financial conditions tighten again to temper heated US economy: McGeever
By Jamie McGeever
ORLANDO, Florida (Reuters) — After 18 months of relentlessly rising borrowing costs, the U.S. economy is accelerating again, begging the question about when or if tightening financial conditions can slow the momentum.
After 525 basis points of interest rate hikes, financial conditions are now the tightest in a year, and biting. This is what the Fed wants, it just doesn't want the teeth of costlier money to sink too deeply into the real economy for fear its other mandate of maximum employment comes unstuck.
The main cause of those squeezed conditions is renewed asset price losses. Treasury bond yields are the highest since 2006-07 at 5% or higher and Wall Street stocks have fallen some 10% in three months, with high yield credit spreads finally widening.
JPMorgan strategists estimate that the impact on GDP from tightening financial conditions takes anywhere from one to two years to be felt. It may be well into next year before the full effects of the 2022-23 tightening shows up in the real economy.
But warning signs are already flashing.
The renewed weakness of U.S. regional bank shares is one of them. All but a few dozen of the 4,000-plus banks in the US are 'small' or 'medium-sized', and they are critical to local business and employment.
There are some 33 million small businesses in the U.S., and they account for around 40% of all jobs nationwide. Their ties to small and regional banks could not be stronger.
Goldman Sachs research earlier this year showed that almost 70% of small firms' commercial and industrial loans are from banks with less than $250 billion in assets, and 30% from banks with less than $10 billion in assets.
The KBW regional banking index on Tuesday hit a five-month low, it is
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