The Fed expects the banking disaster to trigger a recession this 12 months, minutes present
WASHINGTON — The fallout from the US banking crisis is likely to push the economy into recession later this year, according to Federal Reserve documents released on Wednesday.
Minutes from the Federal Open Market Committee’s March meeting included a presentation by staff on the possible implications of the failure of Silicon Valley Bank and other financial sector turmoil that began in early March.
Although vice chairman for oversight Michael Barr said the banking sector was “healthy and resilient,” business economists said the economy was set to take a hit.
“Given their assessment of the potential economic impact of recent developments in the banking sector, the staff forecast at the time of the March meeting included a mild recession beginning later this year, with a recovery over the following two years,” read the summary the meeting .
Post-meeting forecasts suggested Fed officials expect gross domestic product to grow by just 0.4% for all of 2023. With the Atlanta Fed posting a gain of around 2.2% in the first quarter, that would point to a pullback later in the year.
That crisis had sparked some speculation that the Fed might hold the rate line, but officials stressed that more needs to be done to tame inflation.
FOMC officials finally voted to raise the benchmark interest rate by 0.25 percentage point, the ninth increase in the past year. This brought the fed funds rate to a target range of 4.75% to 5%, the highest level since late 2007.
The rate hike came less than two weeks after Silicon Valley Bank, then the 17th largest institution in the US, collapsed following a rush for deposits. The failure of the SVB and two others prompted the Fed to create emergency lending facilities to ensure banks could continue trading.
Since the meeting, inflation data has been mostly cooperative with the Fed’s targets. Officials said at the meeting that they see prices falling further.
“Due to the impact of less forecast tightness in product and labor markets, core inflation has been forecast to slow sharply over the next year,” the minutes read.
However, concerns about general economic conditions remained high, particularly given the banking problems. After the collapse of the SVB and other institutions, Fed officials opened a new borrowing facility for banks and eased emergency loan conditions at the discount window.
The minutes noted the programs helped get the industry through its troubles, but officials said they expect lending to tighten and credit conditions to worsen.
“Despite the measures, participants recognized that there was significant uncertainty about how these conditions would develop,” the minutes read.
Half a point hike, if not because of the crisis?
Several policymakers questioned whether to keep interest rates stable as they watched the crisis unfold. However, they relented and agreed to vote for another rate hike “due to elevated inflation, the strength of recent economic data and their commitment to bring inflation down to the committee’s longer-term target of 2 percent.”
In fact, the minutes noted that some members were leaning toward a half-point rate hike before the banking troubles. Officials said inflation was “far too high,” although they stressed the incoming data and the impact of rate hikes needed to be taken into account when formulating future policy.
“Several participants stressed the need to retain flexibility and optionality in determining the appropriate monetary policy stance given the highly uncertain economic outlook,” the minutes read.
Inflation data was generally cooperative with Fed targets.
The consumer spending index, the inflation gauge most closely watched by policymakers, rose just 0.3% in February and 4.6% on a yearly basis. Monthly profit was less than expected.
Earlier Wednesday, the CPI showed a rise of just 0.1% in March, slowing to an annual pace of 5%, the latter figure falling a full percentage point from February.
However, this CPI read was held back mainly by weak food and energy prices, and a rise in accommodation costs pushed core inflation up 0.4% for the month and 5.6% yoy, slightly above February levels. The Fed expects housing inflation to slow over the course of the year.
On the inflation front, there was some bad news: a monthly survey by the New York Fed showed that inflation expectations for the next year rose half a percentage point to 4.75% in March.
According to data from CME Group on Wednesday afternoon, markets indicated about a 72% chance of another quarter-point rate hike in May ahead of a policy tipping point where the Fed cuts before the end of the year.
Although the FOMC approved an increase in March, it changed the language in the statement after the meeting. Where previous statements referred to the need for “continuous increases,” the committee changed the wording to indicate that further increases “may be appropriate.”