FirstFT: Fed warns of credit crunch risk

The Federal Reserve has warned that the recent turmoil in the banking sector could lead to a credit crunch which threatens to slow down the US economy.

In two separate publications released yesterday, the US central bank highlighted growing concerns that the March collapses of Silicon Valley Bank and Signature Bank, as well as last week’s bankruptcy of First Republic, will lead to a decline in loans from part of the banks and a decline in asset prices.

“A sharp contraction in credit availability would increase the cost of financing for businesses and households, potentially resulting in a slowdown in economic activity,” the Fed said in its semi-annual financial stability report.

The Fed also released the results of its quarterly opinion poll of senior loan officers yesterday, which found banks plan to tighten lending standards in the remainder of 2023.

Fears that banks will cut back on lending come as the risk of a US default hangs over the economy. President Joe Biden will do it today hosting his political opponents in the White House in a push to resolve the US debt ceiling dispute.

The meeting follows a warning from Treasury Secretary Janet Yellen that the United States could exceed the debt ceiling as early as June 1sttriggering an economic and financial catastrophe.

Biden administration officials have considered invoking the 14th Amendment to the US Constitution to allow the government to continue issuing new debt to pay Social Security recipients, bondholders, government employees and others without approval legislative.

But economists and constitutional experts are divided on whether evading Congress in this way is legal.

The public is sharply divided over who to blame if the government defaults on its debt. A Washington Post/ABC poll released last week found that 39% of respondents said they would primarily blame Republicans in Congress and 36% said they would blame Biden. 16% said they would blame both parties equally.

Who do you blame for the current debt standoff? Vote in our latest poll and email firstft@ft.com with your ideas on how you think the impasse can be broken.

Here’s what else I’m keeping an eye out for today:

• Monetary policy: John Williams, chairman of the Federal Reserve’s New York branch, and Fed Governor Philip Jefferson will speak at public events today.

• Results: Warner Music Group, Endeavor Group, Apollo Global, Coty, Airbnb, Electronic Arts and Rivian report the findings.

• Trump court case: A jury in New York will begin deliberations today in the case filed by former E columnist Jean Carroll against former President Donald Trump. Learn more about the two-week trial.

• The future of the car: The two-day live event kicks off today and brings together executives from across the automotive industry. Subscribers to the FT newsletter can register Here.

Five more top stories

1. Fund managers have warned of growing problems in the $5.6 trillion US commercial real estate sector, in a series of interviews. Scott Kleinman, co-chairman of Apollo Global Management, said commercial real estate would be the “next shoe to roll” in the US after the regional banking crisis. Read more of the interviews.

2. Swiss bank UBS today unveiled a number of board changes following its takeover of local rival Credit Suisse, in one of the most significant banking operations since the 2007-2008 financial crisis. Read more about the changes here.

3. Canada has expelled a Chinese diplomat for allegedly targeting a Canadian politicianin the latest example of Ottawa’s harsher tone towards Beijing on everything from election interference to Taiwan. Read more about Canada’s first expulsion of a Chinese diplomat in decades.

4. An ally of President Luiz Inácio Lula da Silva has been appointed to the board of Brazil’s central bank. The appointment comes on the occasion of relations between the 77-year-old president and the central bank they are becoming increasingly tense, unnerving investors.

5. FTX founder Sam Bankman-Fried yesterday asked a New York judge to dismiss the criminal charges brought against him, following the collapse of the cryptocurrency exchange last year. Learn more about Bankman-Fried’s legal documentation.

The big read

After 21 years in power, Recep Tayyip Erdoğan, Turkey’s strongman president, faces his greatest challenge: a united opposition determined to change the course of the nation. Can his opponent, soft-spoken retired bureaucrat Kemal Kılıçdaroğlu, defeat Erdoğan?

We are also reading and listening. . .

Chart of the day

Is hybrid work here to stay? Sarah O’Connor certainly hopes so, as she seems to have improved work-life balance for many people since the pandemic began. The data shows the share of job postings offering fully remote or hybrid work have increased to at least 10% in countries including the US and UK in 2023 from less than 5% before the pandemic.

Take a break from the news

Zurich is a great city for adventures on two wheels. It’s compact enough to escape in minutes, with excellent roads through hundreds of kilometers of varied surrounding terrain. FT Globetrotter faces us five splendid cycle paths in the heart of Switzerland.

Additional contributions by Grace Ramos e Emilia Goldberg