Your Weekend Reading: GOP Debt Limit Threat Looms Over Markets

The economic outlook and health of the global financial system is either stable or scary—depending on who you ask and where you live. US Federal Reserve Chairman Jerome Powell said this week that the possibility of avoiding a recession is “more likely than that of having a recession.” He also opened the door to pausing interest rate hikes following 10 straight increases. “We may not be far off” the level that’s sufficiently restrictive to squash persistent inflation, he said. But a key driver of price pressures, the robust US labor market, held its ground in April with hiring and wage gains accelerating. Across the Atlantic, the European Central Bank slowed interest-rate increases to a quarter-point as inflation shows signs of ebbing—but a pause is not in the cards for now.

Key to whether Powell can achieve his soft landing is the extent of the fallout from a string of regional bank failures. JPMorgan CEO Jamie Dimon, fresh off his purchase of a spiraling First Republic Bank, declared “this part of the crisis over.” But Wall Street wasn’t buying it, and promptly went hunting for weakness among the lender’s fellow midsize banks. Pershing Square’s Bill Ackman said the regional banking system remains at risk and the FDIC’s failure to update and expand its insurance regime has “hammered more nails in the coffin.” At the Milken Institute Global Conference, the popular view from panelists was that smaller banks aren’t out of the woods and an economic contraction is inevitable. But while the opinions are varied, many landed in the same place. “Powell’s message remains sobering—the Fed’s policy rates will only come down with a greater economic slowdown or credit crunch from tightening bank lending standards,” said Yung-Yu Ma of BMO Wealth Management.