The chances of the United States falling into a recession in the next twelve months have increased to 35 percent because of the “near-term uncertainty around the economic effects of small bank stress,” Goldman Sachs warned Thursday.

After the collapse of Silicon Valley Bank and Signature Bank, which has placed pressure on additional institutions, such as Credit Suisse in recent days, Goldman Sachs’ outlook on the U.S. economy has soured amid numerous crises under the Biden administration.

The banking stress is expected to be felt by local community banks. According to Barron’s, “The stress will lead to small banks with a low-share of deposits covered by the Federal Deposit Insurance Corporation (FDIC) reducing lending by 40%, they estimated, with others cutting lending by 15%.”

“Any lending impact is likely to be concentrated in a subset of small and medium-sized banks,” the bank’s analysts warned. “The macroeconomic impact of a pullback in lending will remain highly uncertain until the extent of the stress on the banking system becomes clear.”

Goldman Sachs’s forecast is bad news for the Biden administration. Under its management, the nation has already felt the impact of soaring inflation, a southern border invasion, and international instability with China and Russia.

With the banking sector now under stress, questions remain if the Fed will continue to increase interest rates, one of the only tools it has deployed to reduce inflation. Breitbart News’s John Carney explained the predicament: 

Ever since the Fed started hiking rates at a breakneck pace last year, people have been saying that the Fed would keep hiking until “something breaks.” Something broke. So, now what?

One reason to expect that the current stress in the banking system could convince the Fed to lift its foot from the rate acceleration pedal is that markets are accomplishing a good deal of financial tightening on their own. Bank lending is likely to severely constrict, as banks attempt to hoard liquidity to stave off sudden funding crises. The Fed’s goal of bringing about restrictive financial conditions is happening even without a rate hike.

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That said, it seems unlikely that the Fed will end the rate hike cycle here. The underlying inflationary pressures of very high demand, extremely low unemployment, and recent experience of high inflation remain. Barring the unlikely development of a severe financial crisis, inflation is likely to continue, and financial conditions are likely ease as the immediate market panic subsides.

Follow Wendell Husebø on Twitter @WendellHusebø. He is the author of Politics of Slave Morality.