“The real story for equity markets is the impact of the Fed’s actions over the past year,” Morgan Stanley’s Mike Wilson said Monday, commenting on the second-largest US bank failure in American history and official efforts to avert contagion.

As discussed at length in the weekly+, Fed tightening cycles always end in tears for somebody. It’s just a matter of who ends up crying. This time around, it’s regional banks.

Wilson’s overarching message was that the “long and variable lags” are coming home to roost, and although the emergency plan announced by Treasury and the Fed over the weekend may help prevent additional bank runs, “it does little to change the bigger picture of slowing growth that is already upon us.”

He noted that “the cost of deposits has been on the rise for months,” and pointed to the Senior Loan Officer Survey, which shows lending standards have tightened considerably, and now may tighten further.

The chart above will be familiar to many readers. The breadth of banks tightening loan standards to small firms is consistent with recessions.

“In our view, such tightening is likely to become even more prevalent given last week’s events and that poses headwinds for money supply, and consequently, economic and earnings growth,” Wilson went on. “In other words, it’s now harder to hold the view that growth will prove to be ok in the face of the fastest Fed tightening cycle in modern times.”

Indeed it does look that way. Some observers previously argued Fed tightening was transmitted more efficiently in modernity thanks to the instantaneous impact on markets. If true, that suggested the worst of the drag on growth might’ve occurred late last year.

What such accounts failed to control for was the possibility that financial stability risks accumulated over a dozen years of free money might ultimately be exposed by incremental tightening as the Fed approached terminal. Once exposed, such risks could manifest in a mini-panic, thereby setting in motion a chain of events with the potential to curb growth further.

To be sure, Wilson doesn’t see a repeat of 2008. But, he warned Monday that “last week’s events are likely to have a negative impact on economic growth at a time when growth is already waning in many parts of the economy.”

The figure shows that the tightening delivered since the onset of the Fed’s inflation war early last year is very extreme if you measure from the trough in the shadow rate and account for the compressed time frame.

“Fed policy works with long and variable lags [and] the pace of Fed tightening over the past year is unprecedented when one considers that the Fed has been engaged in aggressive quantitative tightening while raising the Fed funds rate by almost 500bps,” Wilson wrote.

He specifically mentioned the possibility that market participants’ obsession with various real-time gauges of financial conditions might’ve led everyone astray. “The focus on ‘market based’ measures of Financial Conditions may have lulled both investors and the Fed itself into thinking policy tightening had not yet gone far enough even though more traditional measures like the yield curve have been flashing warnings for the past 6+months,” Wilson said.

So, boiling frogs, in other words.