Under Pressure

History shows that when the Federal Reserve is raising rates, an unexpected shock can trigger a recession

- Christopher Condon

Take a tour through US recessions of the past 50 years, and it’s hard not to wonder whether Silicon Valley Bank will turn out to be the banana peel that upends an already unsteady economy.

When the Federal Reserve is raising interest rates, as it is now, recession is always a risk. And slumps tend to come suddenly after an unexpected shock deals a blow to confidence during a particularly vulnerable time.

“The combination of the Federal Reserve trying to slow things down to deal with inflation, financial conditions tightening and then—under the stress—you’re going to see some breakage,” says Peter Hooper, global head of economic research for Deutsche Bank AG.

Sometimes an external blow tips over a slowing economy, as in 1990 when oil prices spiked in reaction to Iraq’s invasion of Kuwait, spoiling Fed Chair Alan Greenspan’s hopes for a soft landing. More often, higher rates reveal hidden weaknesses, especially after a period of easy money or an influx of financial sector deregulation. Sectors that are overleveraged, investment funds with heavily concentrated exposure or banks with too much risk get exposed as the proverbial naked swimmers when the tide goes out.

In the early 1980s, Fed Chair Paul Volcker was waging his now-legendary fight against inflation. It triggered the collapse of Continental Illinois National Bank & Trust Co., then the seventh-largest commercial bank in the US.