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Not even the economists of the Federal Reserve trust and in the soft landing. The minutes of the last meeting of the monetary policy committee of the central bank of the United States show that the technicians of the organism draw a scenario of a “mild recession” later this year. The document, made public this Wednesday, is more interesting than on other occasions because it reflects the deliberations after the episodes of financial instability caused by the fall of Silicon Valley Bank and Signature Bank. According to the minutes, the financial storm led several members to propose a pause in rate increases and to rule out a larger increase than the one that occurred.
For some time, forecasts for the US economy drawn up by experts pointed to moderate real GDP growth for this year and some weakening in the labor market, the minutes explain. “Given their assessment of the possible economic effects of recent events in the banking sector, the forecast of the experts at the March meeting starting a slight recession from the end of this year, with a recovery in the following two years”, add the document. Likewise, the unemployment rate is expected to rise above the natural rate estimated by experts early next year.
In any case, that was the diagnosis a few weeks ago and financial tensions have continued to subside since then. The US economy has so far been able to dodge the much-vaunted recession and bring unemployment down to the lowest levels in more than half a century.
Some of the committee members even raised the possibility of pausing the rise in interest rates in the face of financial instability. “Several participants noted that, in their monetary policy deliberations, they had considered keeping the target range stable at this meeting. They indicated that in this way they would have more time to assess the financial and economic effects of recent developments in the banking sector and the cumulative tightening of monetary policy,” the minutes say.
However, these same participants also observed that the measures adopted by the Federal Reserve in coordination with other public entities contributed to calm the situation of the banking sector and to reduce the short-term risks for economic activity and inflation. Therefore, you consider it appropriate to increase the target range by 25 basis points due to high inflation, the strength of recent economic data and your commitment to reduce inflation to the long-term target of 2%. The decision was made unanimously.
The minutes stress that recent inflation data offer little indication that inflationary pressures are easing fast enough to bring inflation back to 2% over time. Committee members also noted that the recent shock to the banking sector would likely result in a tightening of credit conditions for households and businesses and would weigh on economic activity, hiring and inflation, although the extent of these effects is highly uncertain.
a bigger climb
In the final, all agreed to raise the federal funds interest rate by 25 basis points, until it was between 4.75% and 5%. Some members did indicate that, given the persistence of high inflation and the strength of recent economic data, they would have considered a 50 basis point increase appropriate but for recent developments in the banking sector. “However, due to the possibility that developments in the banking sector will withstand financial conditions and affect economic activity and inflation, consider it prudent to increase the target range by a smaller increment at this meeting. These participants indicated that, in this way, the Committee would have time to better assess the effects of the evolution of the banking sector on credit conditions and the economy, “adds the document.
The minutes are released on the same day that the Bureau of Labor Statistics has released inflation data for March, which shows a fall from 6% to 5% in the general index, but a rebound from 5.5% to 5.6% in core inflation, which excludes food and energy prices. Core inflation thus exceeds general inflation for the primary time since the price crisis began. For this reason, although year-on-year inflation has fallen to its lowest in almost two years, this entrenchment in the less volatile products leads us to forecast new rises in interest rates, probably at the Federal Reserve meeting on the next 2 and 3 mayonnaise.
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