SUMMARY
- "Shark Tank" star Kevin O'Leary predicts potential failures within regional banks due to repeated Federal Reserve rate hikes.
- Despite inflation indicators cooling, the Fed maintains a restrictive policy, with the core inflation rate remaining above the 2% annual target.
- O'Leary encourages investors to observe the small banking sector in the U.S. over the next 90 days, warning of rate hikes beyond current predictions.
Famed investor from "Shark Tank," Kevin O'Leary, has issued a warning about the potential repercussions of the repeated U.S. Federal Reserve rate increases, forecasting possible failures within regional U.S. banks.
Chairman of the Federal Reserve, Jerome Powell, shared the central bank's reservations about declaring victory over inflation despite current indicators suggesting a slowdown in price rises. In June, the consumer price index only climbed 3% from the previous year, hitting its lowest mark since March 2021. Yet, Powell insists on maintaining a restrictive policy for the time being, given that the core inflation rate lingers above 3%, surpassing the 2% annual goal.
In a vivid metaphor, O'Leary likened the persistent rate hikes to continually squeezing a tube of toothpaste: you know something's bound to give, but the uncertainty lies in when and where it will happen. O'Leary, the founder of early-stage venture capital firm O'Leary Ventures, shared his thoughts on CNBC's "Street Signs Asia" following the Federal Reserve's most recent rate hike announcement.
Expressing his concerns, O'Leary stated, "I anticipate - with a degree of caution - the breakdown will likely occur in the regional banks, which are the backbone of 60% of the economy." He also noted the escalating cost of capital is "crippling their real estate loans." Since March, regional banks such as First Republic, Silicon Valley Bank, and Signature Bank have collapsed due to the monetary tightening cycle that has experienced 11 rate hikes since March 2022. This has propelled borrowing costs to the highest point in over two decades.
O'Leary encouraged investors to hold off for 90 days to observe developments in the U.S.'s small banking sector. Additionally, he indicated that the Federal Reserve could increase rates beyond current predictions. "The terminal rate could reach 6.25 or even 6.50," warned O'Leary, figures that exceed the Federal Reserve's median end-2023 prediction of 5.6% and even the most aggressive forecast of 6.1%. "We're seeing the first signs of distress, but the 'Titanic' has not yet sunk," O'Leary cautioned.
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