Powell’s optimistic comments: the Fed is no longer saying that additional firming may be appropriate; the banking system is sound; and the case of avoiding a recession is more likely than that of having a recession.
Policy Actions
- The Committee raised the target range for the federal funds rate by 1/4 percentage point, bringing the target range to 5 to 5-1/4 percent. We are continuing the process of significantly reducing our securities holdings. We have raised interest rates by a total of 5% points over the last 14 months.
- A decision on a pause was not made today. You will have noticed that, in the statement from March, we had a sentence that said the Committee anticipates that some additional policy firming may be appropriate. That sentence is not in the statement anymore. So that’s a meaningful change.
- Our focus remains squarely on our dual mandate to promote maximum employment and stable prices for the American people. Good news!!
Banking System is Sound
- Conditions in the banking sector have broadly improved since early March, and the banking system is sound and resilient. Many banks are now attending to liquidity and taking the opportunity since the events of early March to build liquidity.
- Big deposit flows have stabilized now. Initially, institutional investors took their uninsured deposits and put them in government money market funds, which bought the paper from the Federal Home Loan Banks and things like that.
- There were 3 large banks from the very beginning that were at the heart of the stress in early March. Those have now all been resolved, and all the depositors have been protected. The resolution and sale of First Republic draw a line under that period of stress.
- The run on Silicon Valley Bank was out of keeping with the speed of runs through history. And that now needs to be reflected in regulation & supervision.
- I don’t have an agenda to further consolidate banks. When I was in the government a while back, there were 14,000 banks and now there are 4,000. I personally have long felt that having small, medium, and large-size banks is a great part of our banking system. I think it’s healthy to have a range of different kinds of banks doing different things. I think that’s a positive thing.
Economic Outlook
- While the case of avoiding a recession is more likely than that of having a recession, the committee’s forecast is for a mild recession, characterized as one in which the rising unemployment is smaller than typical in modern-era recessions.
- Inflation has moderated somewhat since the middle of last year.
- The labor market remains very tight. Even so, there are some signs that supply and demand in the labor market are coming back into better balance. The labor force participation rate has moved up in recent months, particularly for individuals aged 25 to 54 years. Nominal wage growth has shown some signs of easing, and job vacancies have declined so far this year. I do not think that wages are the principal driver of inflation.
- Credit conditions had already been tightening over the past year or so in response to our policy actions and a softer economic outlook. But the strains that emerged in the banking sector in early March appear to be resulting in even tighter credit conditions for households and businesses.
- Corporate margins will come down because of a return to full competition, where there’s enough supply to meet demand.
