Shark Tank investor Kevin O'Leary predicts that the US Federal Reserve's continued rate hike cycle could lead to more regional bank failures in the US.
The Fed chairman, Jerome Powell, said that the Fed is not yet fully convinced that inflation has been defeated even though the latest news readings suggest that the rise in prices has taken a long time.
The consumer price index rose by 3% from a year earlier in June, the lowest level since March 2021. But Powell warned that the Fed would have to "keep policy at a restrictive level for some time" and was prepared to raise rates further, as core inflation remained above 3% which is higher than its annual target of 2%.
Said O'Leary, who runs his own early-stage venture capital firm, O'Leary Ventures, “I'm just predicting and I'm very cautious about this that a rate hike will impact regional banks, which support 60% of the economy, ” he said, adding that the sudden increase in the cost of capital “had a big impact on their real estate loans.”
Regional banks such as First Republic, Silicon Valley Bank, and Signature Bank have gone out of business since March. The banks have been hit by a tight money cycle that has seen 11 rate hikes since March 2022, and the latest hike brought benchmark borrowing costs to their highest level in more than 22 years.
He also warned that the Fed could raise the external rate more than currently expected.
This figure is higher than the Fed's end-2023 median funds rate forecast, which stood at 5.6% at the June meeting. It was also higher than the most hawkish forecast of 6.1%, based on the Fed's economic projections released in June.
