US banking crisis sparks recession fears: Fed minutes

April 13, 2023 (MLN): The Likelihood of an economic downturn has soared as recent Federal Reserve minutes, made public on Wednesday, unveiled the alarming repercussions of the US banking crisis, which could potentially push the country towards a recession later this year.

The minutes highlighted the alarming impact of the financial chaos on the country’s economic future.

The minutes from the March meeting of the Federal Open Market Committee (FOMC) discussed the potential repercussions of the failure of Silicon Valley Bank and other financial sector problems that began in early March 2023.

Staff members of the FOMC projected a mild recession beginning later this year, followed by a recovery over the next two years.

However, Michael Barr, vice chair of the Federal Reserve for supervision, was of the view that the banking sector is “sound and resilient.”

FOMC officials expect gross domestic product growth of just 0.4% for all of 2023, according to the projections following the March meeting. This would indicate a pullback later in the year.

The FOMC voted to increase the benchmark borrowing rate by 25 basis points, the ninth increase over the past year, ultimately bringing the Fed funds rate to a target range of 4.75%-5%, its highest level since late 2007.

Since the meeting, inflation data has been mostly cooperative with the Fed’s goals. The minutes stated that core inflation was forecasted to slow sharply next year, reflecting the effects of less projected tightness in product and labor markets.

While the Consumer Price Index (CPI) was limited by stable food and energy prices, core inflation increased by 0.4% in a month and 5.6% year-on-year, slightly higher than the previous month's figure. The Fed anticipates a slowdown in housing inflation in the coming months, minutes of the meeting showed.

However, concern over broader economic conditions remained high, particularly in light of the banking problems.

Some policymakers considered keeping rates stable while observing the unfolding banking crisis. Nonetheless, they eventually decided to vote for an additional rate hike due to concerns about high inflation, positive economic indicators, and a commitment to reducing inflation to the Committee's long-term goal of 2%.

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