SVB's downfall shows the Fed broke something in the economy, and other things could break with more rate hikes, Charles Schwab's chief investment strategist says
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- SVB's downfall shows the Fed broke something in the economy, said Charles Schwab's Liz Ann Sonders.
- She pointed to the Fed's tightening, which has sent interest rates up 1700% over the last year.
- "I would be surprised if there weren't other things that break," she told CNBC on Friday.
The downfall of Silicon Valley Bank shows the Fed broke something in the economy – and other things could break with more rate hikes, according to Charles Schwab's chief investment strategist Liz Ann Sonders.
"I think this is clearly an example of something breaking. You know the old adage of the Fed tightens until something breaks … and this is one of them," Sonders told CNBC on Friday, referring to the Fed's aggressive monetary tightening efforts, which experts warn is putting undue stress on the economy.
Over the last year, central bankers have raised interest rates 1700% to rein in inflation, sparking turmoil in financial markets as it rapidly pulls back liquidity and upends a decade-long era of easy money. Not only could rates this high send the economy into a recession, experts warn, but it's slugged tech and growth stocks, the housing market, and other sectors that thrived under ultra-low interest rates – with Silicon Valley Bank being the latest casualty.
The tech-focused bank rattled markets last week after reporting $1.8 billion in losses from the sale of a bond portfolio, causing a bank run and its eventual closure by the FDIC.
And there's likely to be more signs of damage stemming from the impact of Fed rate hikes, Sonders warned, particularly since them work with a lagged effect in the economy.
"I would be surprised if there weren't other things that break. Maybe not directly related to the problems of SVB, but to some degree we're already seeing breakage in terms of things like weakness in the housing market, other areas that are clearly in recession in the economy, even if we're not in an overall recession," she said.
Fed officials could pause rate hikes as soon as their next policy meeting later this month, in order to quell panic stemming from the implosion of SVB, Goldman Sachs analysts said. That could be a bullish catalyst for the market, as rate hikes weighed heavily on stocks over the last year.
But Sonders doubted the Fed would pivot from its tightening policy, particularly since Silicon Valley Bank's downfall was more due to issues unique to the bank, rather than being a systemic issue.
"I think they're not likely to step into this situation until the point where it's either a serious system-wide problem, or inflation has been combated sufficiently enough that they can look towards easier monetary policy," she said.
Despite previously betting on a 50-basis-point rate hike this month, markets have raised their expectations of a softer policy move, with 61% odds the Fed raises rates just 25 basis points, according to the CME FedWatch tool.