Bank turmoil led Fed officials to forecast fewer rate hikes
Turmoil in the banking system after two major banks collapsed led many Federal Reserve officials to envision fewer rate increases this year out of concern that banks will reduce their lending and weaken the economy
WASHINGTON (AP) — Turmoil in the banking system after two major banks collapsed led many Federal Reserve officials to envision fewer rate increases this year out of concern that banks will reduce their lending and weaken the economy.
The heightened uncertainty surrounding the banking sector also helped Fed officials coalesce around their decision to raise their benchmark rate by just a quarter-point, rather than a half-point, at their meeting March 21-22, according to the meeting minutes.
The Fed also revealed Wednesday that its staff economists have forecast that a pullback in bank lending will cause a “mild recession” starting later this year. That is a shift from their previous estimates, which had predicted that the economy would eke out positive growth this year. If the impact of the banking turmoil ends up being less than economists' forecasts, a recession might be avoided, the minutes suggested.
Overall, the minutes showed that the banking troubles have injected significant uncertainty into the Fed’s decision-making 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 benchmark short-term rate — which affects many consumer and business loans — just once more this year, in May.
