At 5.25% to 5.5%, the target range for the federal funds rate has likely reached its peak in a cycle of policy tightening that began in early 2022, the Federal Reserve said today in the first of its biannual reports to Congress on monetary policy. At the same time, the report noted that the Federal Open Market Committee does not expect to reduce the target range until committee members have greater confidence that inflation is moving sustainably toward 2%.
The report also noted that stress in the banking system has receded since the bank failures last year, and that banks’ regulatory risk-based capital ratios remained solid and increased broadly, as bank profits were robust and banks reduced capital distributions. Still, it cautioned that vulnerabilities in the financial sector remain “notable,” as losses in the fair value of long-dated bank assets remain significant.
“In terms of funding risks, liquidity remains ample, and deposits have stabilized recently,” the Fed said. “The number of banks with large declines in fair value relative to their regulatory capital and heavy reliance on uninsured deposits has declined significantly since March 2023. Overall, banks’ reliance on short-term wholesale funding remained much lower than the typical range before the banking reforms of the previous decade.”
