The US economy is likely to fall into a recession later this year as a result of the banking crisis in the country, according to the minutes from the latest policy meeting of the US Federal Reserve.
Although the Vice Chair for supervisin Michael Barr said that the banking sector is "sound and resilient," in-house economists said that the economy will take a hit.
“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,” minutes from the FOMC meeting said.
Fed officials expect GDP growth of 0.4 percent for 2023. The Atlanta Fed is expecting a 2.2 percent growth in the first quarter of the year, indicating a pullback later in the year.
Officials also stressed that more needs to be done to tame inflation, despite the banking crisis, which led to the street anticipating that the Fed may hold off on aggressively hiking interest rates for the time being. However, in its ninth increase over the last 12 months, the Fed raised benchmark borrowing rates by 25 basis points, taking it to the highest level since 2007.
Consumer Price Index in March dipped to 5 percent in the US, the lowest in nearly two years, from 6 percent in February, but remained above the Fed's 2 percent target. However, core inflation rose 5.6 percent year-on-year, slightly higher than February.
The US banking crisis emerged following the failure of Silvergate, followed by the Silicon Valley Bank, prompting the US central bank to create emergency lending facilities to make sure banks could continue operations.
Minutes also revealed that some members were pushing for a 50 basis points rate hike before the banking crisis emerged, calling inflation "much too high," though they stressed that incoming data and the impact of the hikes will have to be considered when formulating policy ahead.
A monthly survey from the New York Fed showed that inflation expectations over the next year increased half a percentage point to 4.75 percent in March. As of Wednesday, the market is assigning a 72 percent probability to another 25 basis points rate hike in May, before a policy pivot and subsequent rate cuts before the end of the year.
The minutes offset the positive impact from inflation data, dragging indices on Wall Street lower. The Dow Jones snapped a four-day winning streak to end 40 points lower, while the S&P 500 and Nasdaq fell 0.4 percent and 0.85 percent respectively.
(With inputs from agencies.)
