SACHA PFEIFFER, HOST:
Look at the financial markets over the last few days, and you see a general slide downward.
STEVE INSKEEP, HOST:
Which is hardly a crash but does suggest uncertainty after the collapse of two regional banks in California and New York. Yesterday, concerns about a big Swiss bank sparked a sell-off in both the United States and in Europe, which prompts a question - do we need to worry about more than just the banks?
PFEIFFER: NPR's Scott Horsley is with us now to try to answer that. Hi, Scott.
SCOTT HORSLEY, BYLINE: Good morning.
PFEIFFER: Explain the ripple effects here. How does a pair of bank failures end up causing slower economic growth across the whole country?
HORSLEY: It just sparked a lot of uncertainty. Even though U.S. officials acted quickly to limit the damage and reassure depositors that their money is safe, there's just some lingering concern about the problems being more widespread. And, of course, that was amplified yesterday by worries about this big Swiss bank. Now, stock in Credit Suisse rebounded today after that bank got a lifeline from the Swiss Central Bank. But Goldman Sachs is predicting the ongoing tension is going to make banks more cautious about the loans they make, and that cutback in credit could lead to slower economic growth. Now, that's not necessarily a bad thing. Economist Julia Coronado of MacroPolicy Perspectives says it's part of what the Federal Reserve has been trying to achieve with its higher interest rates.
JULIA CORONADO: Consumers are likely to cut back or become more price sensitive and bargain more, and that's how we bring inflation down.
HORSLEY: Yesterday, the Commerce Department reported that retail sales in February were down, suggesting that shoppers are getting more cautious after a big jump in spending in January.
PFEIFFER: And what is the Fed's role here?
HORSLEY: The Fed's got two jobs here - fighting inflation, of course, and safeguarding the stability of the financial system. And it's kind of a coin toss which one's going to get top billing when Fed officials meet next week. People who think fighting inflation is top of mind for the central bank expect the Fed to raise interest rates by another quarter percentage point. But rising interest rates were one of the contributing factors in the collapse of Silicon Valley Bank, so those who are most worried about financial stability think the Fed might pause and keep interest rates where they are next week. That tug-of-war has been playing out in the betting markets all week as analysts try to decide which is the more urgent priority for the Fed.
PFEIFFER: And the interest rates are sort of the short-term job that the Fed needs to get done. What are the longer-term things that can be done to address all these issues in the banking system?
HORSLEY: President Biden said on Monday that he wants Congress and bank regulators to put stronger rules in place to prevent the kind of problems that brought down Silicon Valley Bank in California and Signature Bank in New York. Democratic Senator Elizabeth Warren says part of the problem was that 2018 law that rolled back some of the strict rules put in place after the financial crisis. Warren wants to tighten those rules again so banks the size of Silicon Valley are put through regular stress tests.
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ELIZABETH WARREN: Stress tests - they're kind of like general health checkups. They check your heart. They check your liver. They check your kidneys - because any of them can bring down a bank. It was a mistake to take them away. We got to put them back.
HORSLEY: But Republicans like Senator Kevin Cramer say not so fast. The North Dakota lawmaker says he doesn't want a national fix for what he says may have been a localized problem.
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KEVIN CRAMER: The tendency to rush could be counterproductive. At the same time, somehow we have to create calm where calm doesn't exist, particularly if it's unwarranted alarm.
HORSLEY: So legislative changes look like kind of a long shot, but the Federal Reserve is looking at its own role and how Fed supervisors failed to spot the problems at Silicon Valley Bank and what the Fed might do differently in the future. The central bank has promised a public report in about six weeks.
PFEIFFER: NPR's Scott Horsley. Thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
