The shuffling of deposits from small to large banks could have a disproportionate impact on U.S. small businesses that depend heavily on community and regional financial institutions for credit, Federal Reserve Governor Philip Jefferson said on Monday.
"We are focused on the macroeconomy but we are aware ... that there are potential distributional aspects," if depositors move cash away form smaller banks, Jefferson said.
Jefferson's comments show how the recent failure of Silicon Valley Bank and Signature Bank have complicated what had been a monetary policy debate tightly focused on inflation, and the need to raise interest rates higher to control it. Data last week from the Fed showed a record outflow of deposits from small and smaller regional U.S. banks in the week after Silicon Valley's collapse, with deposits among banks outside the 25 largest dropping by nearly $120 billion in the week ended March 15While a "credit crunch" could aid the Fed's fight against inflation but leave less money in the pockets of businesses and households, too sharp or disorderly a contraction could lead to a recession.
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