Tensions around the banking system seem to have eased somewhat following the government’s support packages for Signature and SVB, the Swiss National Bank’s credit line to Credit Suisse, and the deal to secure First Republic; yet newly released Fed data suggest that banks are still facing a lot of stress. This episode is a clear demonstration that central bank tightening (ECB increasing rates by a further 50 basis points yesterday and the Fed likely to raise by a further 25 basis points next week) is having a very real impact on the economy, despite what we are seeing in (lagging) indicators such as employment and inflation.

It is worth remembering that monetary policy acts with lags estimated at roughly 12-24 months, and considering we are only 12 months into what has been one of the most aggressive tightening cycles on record, we should expect ongoing pressure on the economy over the coming quarters as those cumulative lagged effects continue to play out.

The Fed’s new Bank Term Funding Program (BTFP), which was unveiled over the weekend, is a powerful new facility that is helping patch over these tensions; however, its introduction may have also opened up Pandora’s box regarding what might be expected by banks during future crises—thereby introducing a greater element of moral hazard. We share some thoughts on the Fed's new program in this Economics Weekly.

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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.