To say this week has been eventful would be an understatement. Two banks have failed so far, the 2nd and 3rd largest bank failures in US history if you’re keeping track. Credit Suisse, an international investment bank, also had to get bailed out by the Swedish government as well. So the big question is why did these bank fail and what does this mean for mortgage rates. To put it simply these banks failed due to a bank run. Banks don’t keep the full amount of what you deposit on hand. They keep a portion and then loan out the rest out. If everyone tries to pull out their money all at once the bank will run out of money and that causes it to collapse. If you watched It’s a Wonderful Life where George Bailey has to convince everyone not to take their money out of the Savings & Loan, he was trying to prevent a bank run. If you’re worried about your money that is in a local bank you don’t have much to fear unless you have over $250k in deposits. The government insures all deposits up to $250k although I wouldn’t be shocked if they increased this number due to recent events. Now if you’re a small business that has more than that in one bank, especially a regional bank, then you have a bit more to be worried about.

It seems like the damage is self contained, it doesn’t appear to be a 2008 all over again. That being said we there is no way to be entirely sure. One of the problems the Fed has created with the sharp rise in rates is that treasury bonds are becoming a much more attractive to put your money in. Today you can get a six month treasury bond for 4.6%, last week you could get one for 5%. If you check your local bank I doubt you are getting that kind of return. With inflation at 6% though even that return you are still losing money. There is just no where to hide your money right now but the last on the list is a bank where there is a non zero chance that the bank may go under.

On top of all these bank failures, the inflation report also came out this week and flew under the radar. Year over year inflation is at 6% which was in line with expectations. Make no mistake, that’s still to high for the Fed’s liking. Before these bank failures the Fed was expected to raise rates by .5%. Now it could be .25% or they might not raise them at all. Out of all the meetings this one is going to be the hardest to predict. In some ways it won’t matter because the expectation is that this will most likely be the last hike for the foreseeable future. It’s going to be tough for the Fed to keep raising rates when cracks are starting to form in the economy. It’s one thing if a business goes under, it’s very much a different story when multiple banks are failing. Not to mention that all banks are going to view this as a wake up call and really look into the types of loans they are making. Most likely there is going to be less lending that will be taking place which means less money in the system which should mean less inflation overall. While a little less lending could help inflation, if banks are to afraid and really restrict lending then that is how you get a bad recession.

What does that mean for rates? Luckily for us this uncertainty and fear has caused rates to go down. I expect that to continue although don’t be surprised if you see rates spike again as we have seen this week already. For now though I do see this fear and uncertainty put a cap on how high rates will go.

Recap:

-The 2nd and 3rd largest bank collapse occurred this past week causing fear in the markets
-Year over year inflation is at 6%, in line with expectation
-Fed meeting next week will be interesting, most likely .25% increase in or they may not increase rates at all
-The next couple weeks should help clarify if there are additional risks to any other banks
-Until there is more clarity I would expect rates to be volatile but good chance we see lower rates overall.