Fed economists project recent banking crisis will tip economy into recession

Federal Reserve economists are predicting that the recent banking crisis will trigger a recession in the US, according to newly released minutes.

The notes from the March 21-22 meeting of the Fed, released Wednesday, show how the collapse of Silicon Valley Bank and Signature Bank of New York dominated the discussion.

“Given their assessment of the potential economic effects of recent developments in the banking sector, the workforce projection at the time of the March meeting included a mild recession that started later this year, with a recovery over the next two years,” he said. the summary of the meeting. .

The minutes are cautious about whether Fed policymakers agreed with the staff assessment, though they noted that Vice Chairman of Supervisory Authority Michael Barr said the banking sector is “healthy and resilient.”

Participants also noted that recent developments in the banking sector were likely to lead to tighter credit conditions for households and businesses and weigh on economic activity, hiring and inflation, although the magnitude of these effects was highly uncertain. minutes.

Major Wall Street stock indices turned negative after the minutes were released, with the Dow Jones Industrial Average closing 38.29 points, or 0.1 percent, at 33,646.50.

Overall, the minutes showed that the banking problems added significant uncertainty to the Fed’s decision and reversed an emerging trend to continue to aggressively raise rates to quell inflation.

At their meeting last month, Fed officials predicted they will raise their key short-term interest rates — which affect many consumer and business loans — just once more this year, at their meeting in May.

Before the collapse of Silicon Valley Bank, many officials said they had expected to forecast more than one more hike this year, as economic and inflation data showed the Fed still had more to do to contain the pace of price increases.

Instead, Fed officials agreed that the collapse of the two big banks would “likely lead to some weakening of credit conditions” as banks sought to preserve capital by limiting lending to consumers and businesses.

Wall Street’s major stock indices turned negative after the minutes were released, with the Dow Jones Industrial Average closing 38.29 points

The Fed has raised interest rates rapidly over the past year to fight inflation, but higher rates increase the risk of a recession and depress prices for stocks and other investments

After the new inflation data, the probability that the Fed will maintain current rates at its next meeting increased slightly to 33%, with a 67% probability of a quarter-point increase

Several officials said they considered leaving rates unchanged at last month’s meeting.

But they added that actions by the Fed, the Treasury Department and the Federal Deposit Insurance Corp. ‘helped calm banking conditions’ and reduced risks to the economy in the near term.

Some other officials said last month they favored a half-point increase as data on hiring, consumer spending and inflation still pointed to a hot economy.

But given the uncertainty caused by the banking problems, they deemed it prudent to implement a smaller increase of a quarter point.

The Fed has raised interest rates rapidly over the past year to fight inflation, but higher rates increase the risk of a recession and depress prices for stocks and other investments.

The minutes followed an inflation report that came in cooler than expected, but revealed more stubborn underlying data on core prices and hinted at the likelihood of another policy rate hike when the Fed meets next month.

Financial markets are predicting about a two-thirds chance that the Fed will raise rates another quarter point at the May 2-3 meeting, with a one-third chance that rates will remain unchanged.