Fed Minutes "Year-End Recession Expected Due to Bank Anxiety"...Calls for Pause Also Raised

Members of the U.S. Federal Reserve (Fed) mentioned the possibility of an economic recession in the second half of the year during the March Federal Open Market Committee (FOMC) regular meeting held amid the turmoil following the Silicon Valley Bank (SVB) crisis. It was confirmed that some participants argued that temporarily pausing interest rate hikes would be appropriate. However, there was consensus that easing inflation remains the top priority, and the Fed ultimately continued with a 0.25 percentage point increase in the benchmark interest rate, known as a 'baby step.'

[Image source=Reuters Yonhap News]

According to the minutes of the March FOMC meeting released by the Fed on the 12th (local time), participants assessed that "considering the potential economic impact of the banking sector, a mild recession may appear from the end of this year" and that "recovery will take about two years."

Amid rising concerns over a banking crisis following the consecutive failures of SVB and Signature Bank, the March FOMC featured in-depth discussions on the potential economic fallout from the banking crisis. At this meeting, some participants suggested that "it is appropriate to consider temporarily holding rates steady until the full impact on the economy is understood." They argued that further rate hikes could provoke greater turmoil.

On the other hand, a minority of 'hawkish' voices called for expanding the rate hike to as much as 0.5 percentage points. They claimed that emergency measures by U.S. authorities had improved liquidity, reducing the likelihood of a broader crisis. Concerns were also raised about persistent inflation and an overheated labor market, which remain strong indicators.

The minutes stated, "Participants agreed that U.S. inflation remains well above the 2% target, and recent data do not show signs of easing inflationary pressures." They also added, "Inflation remains high and the labor market remains tight," and "additional tightening measures were deemed appropriate."

Despite concerns over the banking sector crisis, priority was given to stabilizing soaring inflation. Fed Chair Jerome Powell also confirmed during a press conference immediately after the meeting that discussions about pausing rate hikes had taken place, stating, "Given that data on inflation and the labor market were stronger than expected, we decided it was appropriate to continue raising rates." Earlier, at the FOMC held on March 21-22, the Fed raised the benchmark interest rate by 0.25 percentage points to a range of 4.75% to 5%. However, it simultaneously removed the phrase 'ongoing increases' from the policy statement and maintained the year-end rate forecast at 5.1% on the dot plot, suggesting that the tightening cycle is nearing its end.

Additionally, the minutes noted that participants expected supply-demand imbalances in manufacturing and the labor market to gradually ease, and that core inflation would sharply decelerate next year. They also emphasized the need for flexibility in monetary policy decisions given the uncertain economic outlook.

This content was produced with the assistance of AI translation services.