Fed expects banking crisis to cause a recession this year, minutes show

https://www.cnbc.com/2023/04/12/fed-expects-banking-crisis-to-cause-a-recession-this-year-minutes-show.html

Fallout from the U.S. banking crisis is likely to tilt the economy into recession later this year, according to Federal Reserve documents released Wednesday.

Minutes from the March meeting of the Federal Open Market Committee included a presentation from staff members on potential repercussions from the failure of Silicon Valley Bank and other tumult in the financial sector that began in early March.

Though Vice Chair for Supervision Michael Barr said the banking sector “is sound and resilient,” staff economists said the economy will take a hit.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the meeting summary stated.

Projections following the meeting indicated that Fed officials expect GDP growth of just 0.4% for all of 2023. With the Atlanta Fed tracking a Q1 gain around 2.2%, that would indicate a pullback later in the year.

That crisis had caused some speculation that the Fed might hold the line on rates, but officials stressed that more needed to be done to tame inflation.

Federal Open Market Committee officials ultimately voted to increase the benchmark borrowing rate by 0.25 percentage points, the ninth increase over the past year. That brought the fed funds rate to a target range of 4.75%-5%, its highest level since late-2007.

The rate hike came less than two weeks after Silicon Valley Bank, at the time the 17th largest institution in the U.S., collapsed following a run on deposits. The failure of SVB and two others spurred the Fed to create emergency lending facilities to make sure banks could continue operations.

Since the meeting, inflation data has been mostly cooperative with the Fed’s goals. Officials said at the meeting that they see prices falling further.

“Reflecting the effects of less projected tightness in product and labor markets, core inflation was forecast to slow sharply next year,” the minutes stated.

But concern over broader economic conditions remained high, particularly in light of the banking problems. Following the collapse of SVB and two other institutions, Fed officials opened a new borrowing facility for banks and eased conditions for emergency loans at the discount window.

The minutes noted that the programs helped get the industry through its troubles, but officials said they expect lending to tighten and credit conditions to deteriorate.

“Even with the actions, participants recognized that there was significant uncertainty as to how those conditions would evolve,” the minutes said.