FOMC minutes: Banking sector woes further cloud economic outlook

The economic fallout from last month’s bank closures led some Federal Open Market Committee members to support a lower increase in the federal funds rate than they had anticipated up to that point, according to minutes released today of the committee’s March meeting. The minutes show that all FOMC members supported an increase of 25 basis points given persistent inflation, a strong labor market and solid wage growth. However, turmoil in the banking sector further clouded the economic outlook, with Federal Reserve staff anticipating a mild recession beginning later this year, followed by a two-year recovery period. Some FOMC members said they would have instead supported raising the rate by 50 basis points had the closures not happened.

“[D]ue to the potential for banking-sector developments to tighten financial conditions and to weigh on economic activity and inflation, they judged it prudent to increase the target range by a smaller increment at this meeting,” according to the minutes. “These participants noted that doing so would also allow the committee time to better assess the effects of banking-sector developments on credit conditions and the economy as the committee moved toward a sufficiently restrictive stance of monetary policy.”

FOMC members noted that the banking sector was sound and that “the most significant issues appeared to have been limited to a small number of banks with poor risk-management practices.” They also anticipated that some additional policy firming may be appropriate to attain a sufficiently restrictive policy stance to return inflation to the Fed’s 2% target. Recent developments were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation, but the extent of those effects was uncertain, the FOMC concluded.