The minutes from the March 21-22, 2023 Federal Open Market Committee (FOMC) meeting reiterated that price and financial stability are of paramount importance to the Fed.
On the economy, the Committee members noted that “recent indicators pointed to modest growth in spending and production. At the same time, though, participants noted that job gains had picked up in recent months and were running at a robust pace; the unemployment rate had remained low. Inflation remained elevated.”
Committee members noted that despite a sound and resilient banking system, “recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.” Participants noted however, that the total effect on economic activity is uncertain at this time.
Participants discussed fears of contagion from developments in the banking sector noting that, “the most significant issues appeared to have been limited to a small number of banks with poor risk management practices and that the banking system remained sound and resilient.”
The minutes showed that several participants “considered whether it would be appropriate to hold the target range steady at this meeting”. Ultimately, participants judged that a 25-basis point increase was appropriate given the strength in recent data and persistently high inflation. Some participants stated that in the absence of the recent banking tumult, a 50-basis point increase may have been suitable given the strength in the economic backdrop.
On the future path of monetary policy, committee members anticipated that “some additional policy firming may be appropriate to attain a sufficiently restrictive policy stance to return inflation to 2 percent over time.” Future rate increases will be dependent on the extent to which credit and financial conditions impact economic activity.
Key Implications
Today’s minutes confirmed that the Fed is closing in on the end of its rate hiking cycle. The disinflationary process has been slow to take hold and the economy remains resilient under the weight of higher interest rates. However, tighter credit conditions stemming from the recent banking turmoil are likely to act as a headwind for economic activity offsetting the need for additional monetary restraint. This has been reflected in the volatility of the U.S. 2-year treasury yield, which had fallen as much as 129 basis points from its March peak, and is currently down 102 basis points.
Despite the Fed being able to quell contagion in the banking sector, financial markets have sharply adjusted their view of the future path of interest rates downward since the banking tumult. A possible credit crunch has also been echoed in recession fears that have increased in recent weeks. We expect the Fed to increase rates by 25 basis points in May, before stepping to the sidelines to monitor the impact of its actions on the economic landscape.
 meeting reiterated that price and financial stability are of paramount importance to the Fed.){kind=link}