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The US economy will likely fall into recession later this year due to the crisis in the banking sector, according to the minutes of the latest Federal Reserve Policy meeting released Wednesday.
According to the minutes of the Federal Open Market Committee’s March 21-22 meeting, several policymakers of the US central bank last month considered pausing interest rates after the failure of two regional banks and a forecast by Fed staff that banking sector stress would tip the economy into recession.
According to the minutes, assessing the potential fallout of the banking sector, Feb staff projected a ‘mild recession’ starting later this year, with a recovery in 2024-2025.
Recession is defined “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” It is officially declared by National Bureau of Economic Research, a group of economists.
However, the collapse of the Silicon Valley Bank on March 10 and that of the Signature Bank on March 12, did little to derail the Fed’s rate-hike campaign, and the policymakers agreed to go for another rate hike, despite the risk of recession.
“Several participants … considered whether it would be appropriate to hold the target range steady at the meeting” to assess how financial sector developments might influence lending and the path of the economy, according to the Fed minutes.
Even those policymakers who debated a pause ended up supporting the Fed’s quarter-percentage-point rate increase, agreeing with other policymakers that actions taken by financial regulators and the Fed had “helped calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation,” the minutes said.
Meanwhile, US inflation “remained well above the Committee’s longer-run goal of 2%,” and Fed officials “concurred … that the recent data on inflation provided few signs that inflation pressures were abating at a pace sufficient to return inflation to 2% over time,” the minutes showed.
US consumer price inflation climbed 0.1 per cent in March, an improvement from the 0.4 per cent rise in February, as the cost of gasoline declined; but high rents kept the underlying inflation pressures high.
