Recession Looms as Federal Reserve Predicts Economic Downturn
According to minutes from the March meeting of the Federal Open Market Committee, the Federal Reserve has warned that the U.S. banking crisis may cause a recession later this year.
The meeting included a presentation from staff members on the potential repercussions of the recent failure of Silicon Valley Bank and other financial sector disruptions that started in early March.
In March, during a Federal Open Market Committee meeting, staff economists predicted that the recent developments in the banking sector could have an economic impact. The staff’s projection was based on their assessment of the situation at the time, as stated in the meeting summary.
While Vice Chair for Supervision Michael Barr reassured that the banking sector was robust, the staff economists projected a mild recession later in the year, followed by a two-year recovery.
The crisis caused some speculation that the Fed might hold the line on rates. However, officials emphasized that more needs to be done to curb inflation. The FOMC ultimately voted to increase the benchmark borrowing rate by 0.25 percentage points, marking the ninth increase over the past year. The fed funds rate is now at a target range of 4.75%-5%, the highest level since late 2007.
The rate hike occurred less than two weeks after Silicon Valley Bank, which was the 17th largest institution in the U.S. at the time, collapsed following a run on deposits.
The failure of SVB and two other institutions prompted the Fed to create emergency lending facilities to ensure that banks could continue operating.
According to the meeting minutes, inflation data has been mostly consistent with the Federal Reserve’s objectives since the meeting. Officials commented during the meeting that they anticipate prices to decrease further.
Overall, the Fed’s meeting minutes indicate that the U.S. banking crisis can potentially affect the economy and cause a recession later in the year. Despite this, Fed officials have taken steps to control inflation and ensure that banks can continue to operate.