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Bank loan worries make it easier for Fed to cut interest rates
As news of sour banks loans rattled Wall Street, CNBC’s Jim Cramer said the developments will pave the way for the Federal Reserve to lower interest rates — a move that investors across the board have been hoping for.
“Today got real ugly, but at least we finally have something that can make the Federal Reserve itchy to cut interest rates sooner rather than later: bank loans gone bad,” he said. “Nothing motivates the Fed to move faster than credit losses, because they’re a definitive sign that the economy is going south.”
The averages dipped during Thursday’s session as fears about the health of regional banks’ lending business grew. The Dow Jones Industrial Average shed nearly 0.7%, while the S&P 500 lost 0.6% and the Nasdaq Composite finished down 0.5%, lead by declines in bank stocks.
Worries about lending practices — especially in the private credit market — ramped up recently after two auto industry related outfits, Tricolor and First Brands, filed for bankruptcy. Zions Bancorporation disclosed a $50 million loss on two commercial loans Wednesday evening, and then on Thursday, Western Alliance alleged that a borrower had committed fraud.
These bad loans are early warning signs that it’s time for the central bank to ease, Cramer said. He suggested the banking system has now “provided us with enough questionable credits in one week’s time” that the Fed can quickly slash rates without worrying too much about inflation.
While lower borrowing rates stimulate the economy generally, Cramer emphasized that they also make it easier for borrowers not to default.
Cramer referenced comments from JPMorgan CEO Jamie Dimon who earlier this month suggested the auto companies’ bankruptcies were like cockroaches, saying “when you see one cockroach, there are probably more.” Dimon’s comments turned out to be prescient, Cramer indicated.
But these credit issues may not hurt the broader market, Cramer suggested.
“Now, it’s possible there’s foul play involved in that multi-million problem of First Brands,” he said. “Doesn’t matter, though: a bad loan is a bad loan is a bad loan, and that’s good for the stock market because these bad loans won’t hurt profits of anything other than the banks. The pain will be contained, I think.”
