Fed policy changes risk banking squeeze and lending crunch

The US Federal Reserve is ending a program (BTFP) that has supported banks since regional bank failures in 2023. This could increase banks' borrowing costs and lead them to raise rates or restrict lending.

Separately, the effects of the Fed's quantitative tightening (QT) policy to reduce excess liquidity could soon be fully felt as a buffering program winds down. This could also make banks more risk-averse.

These two policy changes happening in close succession could damage the economy if banks become much less willing to lend.

Banks face other headaches like lower demand for office space that could further weaken their positions.

The Fed needs to consider ending QT soon to avoid an excessive squeeze on liquidity that could spur a new banking crisis.