The collapse of two banks in March—and the turmoil that ensued—prompted several Federal Reserve officials to contemplate a pause in the central bank’s tightening cycle and led Fed staff to forecast a mild recession starting later this year.
The minutes from the Fed’s March 21-22 policy meeting, released Wednesday afternoon, show just how much uncertainty the financial chaos unleashed, and how it influenced the path forward for monetary policy.
Meeting just over a week after the Fed assembled an emergency lending program meant to shore up confidence and stability in the country’s financial system, officials were still working to digest what the banking turmoil signaled about the health of the broader financial system, and what impact it might have on the broader economy.
Participants in the meeting “generally observed that the recent developments in the banking sector had further increased the already-high level of uncertainty associated with their outlooks for economic activity, the labor market, and inflation,” the minutes say.
While they ultimately decided to move forward with a quarter-percentage-point interest-rate increase, the minutes show several participants emphasized the need to “retain flexibility and optionality” in charting the path forward for monetary policy, given just how much was still unknown.
“Even in the minutes, you can kind of feel the emotional-crisis sense of everything that was going on,” says Kaleb Nygaard, a former Chicago Fed analyst who studies central banking as a research fellow at the University of Pennsylvania.
The Fed’s March meeting came amid intense economic crosscurrents. Data on inflation and the labor market had come in stronger than expected since the start of the year, but the bank failures were suggesting broader economic weakness than initially thought.
Before the banks failed, the broad-based strength was leading some Fed officials to contemplate whether a larger half-point rate hike might be warranted in March and whether the peak interest rate would need to be adjusted higher.
But the collapse of the banks—and especially the high degree of uncertainty it brought—led officials to back away from a bigger jump and begin considering an outright pause. The thinking among several participants was that not raising rates “would allow more time to assess the financial and economic effects of recent banking sector developments and of the cumulative tightening of monetary policy,” the minutes say.
Ultimately, the minutes show it was the combination of “slower-than-expected progress on disinflation,” a tight labor market, and the view that emergency lending programs had successfully stabilized the financial sector led the central bank to raise rates at all, notwithstanding the economic uncertainty that remained.
Officials set their target for the fed-funds rate at 4.75%-5%, up from near zero before mid-March 2022.
Perhaps as telling as what was included in the minutes is what wasn’t included. Wednesday’s release offered very little insight into what might be coming next for the central bank. That may well reflect just how little clarity there was as of the March meeting as to where things might be headed, given that the banking turmoil appeared to be ongoing and the impact less than clear.
There was no mention of any participant pushing for ongoing rate increases, a phrase the Fed has used in the past to suggest multiple rate hikes were still on the horizon, noted Gregory Daco, chief economist with EY-Parthenon.
“This aligns with the FOMC statement noting that ‘some additional policy firming may be appropriate’ and Fed Chair Powell’s press conference statement noting that the focus should be on ‘the words ‘may’ and ‘some’ as opposed to ‘ongoing’,’” Daco wrote.
The Fed is now closely monitoring economic data ahead of its May 2-3 meeting, at which point it will once again be considering whether to raise interest rates by another quarter-point or to hold them steady.
Write to Megan Cassella at megan.cassella@dowjones.com
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