According to Federal Reserve data published on Wednesday, the effects of the U.S. banking crisis are expected to cause the economy to enter a recession later this year.
The demise of Silicon Valley Bank and other turmoil in the financial industry that started early in March were discussed in a presentation by staff members at the Federal Open Market Committee’s meeting in March.
Although Michael Barr, vice chair for supervision, claimed that the banking industry is “sound and resilient,” staff economists predicted that the economy will suffer.
“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.
Following the meeting, projections showed that Fed policymakers anticipate a 0.4% annual increase in the gross domestic product. The Atlanta Fed’s projection of a 1.4% first-quarter rise would suggest a pullback later in the year.
Although there had been some speculation that the Fed might maintain rates in the wake of the crisis, policymakers emphasized that more needed to be done to control inflation.
The benchmark borrowing rate was subsequently raised by 0.25 percentage points by the FOMC, the ninth increase in the previous year. The Fed Funds Rate then increased to its highest level since late 2007—a target range of 4.75–5 percent.
A run on deposits caused Silicon Valley Bank, at the time the 17th largest institution in the United States, to collapse less than two weeks before to the rate increase. The Fed established emergency lending facilities in response to SVB and two other banks failing to ensure that banks could continue to operate.
The inflation data since the meeting has generally complied with the Fed’s objectives. Officials stated at the conference that they anticipate further price declines.
“Reflecting the effects of less projected tightness in product and labor markets, core inflation was forecast to slow sharply next year,” the minutes said.
(Adapted from CNBCTV18.com)
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