Several Federal Reserve policymakers last month considered pausing interest rate increases after the failure of two regional banks and a forecast from Fed staff that banking sector stress would tip the economy into recession.
But even they concluded high inflation remained so paramount they pressed on with a rate hike despite the risk.
After an unexpectedly complex debate that reshaped some policy views in real time, the dramatic developments after the March 10 failure of Silicon Valley Bank ultimately did little to derail the Fed’s rate-hike campaign, with officials convinced they could battle inflation with one set of tools and stabilize financial markets with others.
“Several participants … considered whether it would be appropriate to hold the target range steady at the meeting” to assess how financial sector developments might influence lending and the path of the economy, according to the minutes of the Federal Open Market Committee’s March 21-22 meeting, which were released on Wednesday.
Fed staff assessing the potential fallout of banking sector stress projected a “mild recession” starting later this year, with a recovery in 2024-2025, the minutes showed.
Even so, those several Fed policymakers who debated a pause ended up supporting the central bank’s quarter-percentage-point rate increase, agreeing along with other policymakers that actions taken by U.S. financial regulators and the Fed had “helped calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation,” the minutes said.
Inflation, meanwhile, “remained well above the Committee’s longer-run goal of 2%,” and Fed officials “concurred … that the recent data on inflation provided few signs that inflation pressures were abating at a pace sufficient to return inflation to 2% over time.”
The minutes showed a committee forced by the failures of Silicon Valley Bank and Signature Bank into an unexpectedly complex debate, but ultimately moving forward with higher interest rates.
“Some participants noted …they would have considered a 50-basis-point increase … in the absence of the recent developments in the banking sector,” the minutes said. “Participants agreed that recent banking developments would factor into the Committee’s monetary policy decisions to the extent these developments affect the outlook for employment and inflation and the risks surrounding the outlook.”
Most Fed policymakers since the March meeting, with the notable exception of Chicago Fed President Austan Goolsbee and San Francisco Fed President Mary Daly, have concentrated their remarks on the need to bring down inflation rather than the risk of tightening credit conditions.
Policymakers at the March meeting did weaken their commitment to further rate hikes, dropping the stated need for “ongoing increases” from the policy statement in favor of saying only that “some further” tightening would likely be needed.
It was clear from the minutes that the failures of SVB and Signature Bank introduced a new sense of caution, with officials ditching consideration of half point hikes, and indicating financial stability issues would be closely watched.
Projections published at the meeting show most policymakers expect to need to deliver one more interest-rate hike before stopping.
“Participants observed that inflation remained much too high and that the labor market remained too tight; as a result they anticipated that some additional policy firming may be appropriate,” the minutes said.
Financial markets were little changed after the minutes.
“I didn’t see anything new that was so significant in this FOMC report that is going to change my mind about anything. They are going 25 and then they are going to pause,’ said Ken Polcari of Kace Capital Advisors.