CNBC Daily Open: After the rescue of the First Republic, the banking crisis looks (again) contained

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The banking crisis appears to be contained for the time being… again.

• The European central bank raised interest rates by 50 basis points, or half a percentage point, to 3%. The move comes after – and despite – yesterday’s turmoil in the European banking sector, prompted by a sell-off at Credit Suisse. Therefore, alongside its rate hike, the ECB said it was ready to support banks if needed.

• Smaller banks could be left out of efforts to protect the banking system. US Treasury Secretary Janet Yellen said only banks that “would create systemic risk and significant economic and financial consequences” would protect their uninsured deposits.

• PROFESSIONAL Markets expect the US Federal Reserve to hike interest rates by a quarter of a point next week. But there is a possibility that the central bank will pause rate hikes.

At the risk of jinxing the situation, the banking crisis that has now spread from the US to Europe seems (again) contained.

That’s thanks to the extraordinary number of actions that financial regulators and central banks on both sides of the Atlantic have taken to boost confidence. And these aren’t just empty promises. For example, four days after the Fed introduced the Bank Term Funding Program – which lends banks money for a year in exchange for high-quality collateral – financial institutions have done so already borrowed $11.9 billion from the program. Whether this number reveals a significant weakness in banks’ balance sheets is not really decisive. It is important that consumers and investors are psychologically reassured.

Wall Street was applauded by the quick response to the banking crisis. With the Dow Jones Industrial Average up 1.17%, the S&P 500 up 1.76% and the Nasdaq surprisingly up 2.48% – technology stocks had a very good Thursday. Alphabet was up 4.38%, Amazon was up 3.99%, and Microsoft was up 4.05%. Microsoft rallied after the company announced it would be adding artificial intelligence capabilities called Copilot to apps like Word, Powerpoint and Excel. But the other tech giants are likely up because investors have been betting — now that there’s evidence that something in the economy is collapsing — that the Fed might not be as aggressive in raising rates. Technology companies would benefit most from this.

This would also benefit the broader economy, which according to Goldman Sachs has a 35% chance of sliding into recession in the next 12 months, up from 25% before the banking crisis. The Fed’s dual mandates of stabilizing the economy and fighting inflation are increasingly at odds with each other. It won’t be an easy job.

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