Bloomberg reported that the return of the US Treasury to the debt market and new capital requirements could turn into a serious problem for US banking stocks.
US bank stocks fell yesterday, and investors fear that an influx of Treasury bills after the US government debt ceiling has been raised will drain creditors’ liquidity.
The US government is expected to issue short-term debt of $1 trillion or more to replenish its treasury, which was close to zero during the political debate over the debt ceiling.
Some analysts warn that this influx of new banknotes could drain bank reserves at a time when liquidity is vital to maintaining balance sheets, given the recent disruption to the financial system caused by the regional banking crisis.
The US Federal Reserve faces a difficult choice
The next June meeting will be one of the toughest for the US Fed, led by Jerome Powell, as the Fed’s Open Market Committee is fighting on two fronts as it seeks to bring inflation down to its 2% target without raising key interest rates, as the move leading to a recession in the economy.
The U.S. Federal Reserve is expected to back off on its rate hike at its June 13-14 meeting, after raising rates by a quarter point to a target range of 5% to 5.25% at its meeting last May.
Expectations emerge to give time to assess how previous increases in interest rates and inflation have affected inflationary pressures in the economy. The US Fed also wants to avoid raising interest rates to the point that it slows down borrowing and spending, which could cause a recession in the US economy.