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

The minutes from the Fed’s March 21-22 meeting, released on 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 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 said. 

The minutes are circumspect about whether Fed policymakers agreed with the staff assessment, though they noted that Vice Chair for Supervision Michael Barr said the banking sector ‘is sound and resilient.’ 

Federal Reserve staff economists project that the recent banking crisis will trigger a recession in the US. Fed chair Jerome Powell is seen above

‘Participants also noted that recent developments in the banking sector would likely result in tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation, though the extent of these effects was highly uncertain,’ the minutes noted. 

Wall Street’s main stock indexes turned negative after the minutes were released, with the the Dow Jones Industrial Average closing down 38.29 points, or 0.1 percent, at 33,646.50. 

Overall, the minutes showed that the banking troubles injected significant uncertainty into the Fed´s decision and reversed an emerging trend to keep raising rates aggressively to quell inflation. 

At their meeting last month, Fed officials projected that they will raise their key short-term rate – which affects many consumer and business loans – just once more this year, at their May meeting.

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

Instead, Fed officials agreed that the collapse of the two large banks ‘would likely lead to some weakening of credit conditions,’ as banks sought to preserve capital by curtailing lending to consumers and businesses.

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

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

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

Several officials said they had considered supporting 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. had ‘helped calm conditions’ in banking and reduced the risks to the economy in the short run.

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

But given the uncertainty resulting from the banking troubles, they ‘judged it prudent’ to implement a smaller quarter-point increase. 

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

The minutes followed an inflation report that was cooler than expected, but which revealed stickier underlying data on core prices and cemented the likelihood of another policy rate hike when the Fed convenes next month. 

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

Source: | This article originally belongs to Dailymail.co.uk

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