Federal-Reserve
The FOMC press conference on March 22, 2023, addressed concerns about the banking sector and the Federal Reserve's actions in response. Fed Chair Powell reassured that the banking system is safe and sound, with the Fed prepared to use all tools as needed to maintain its safety. With high inflation causing hardship and subdued growth projected to continue, the Fed is committed to returning inflation to its 2% objective and closely monitoring the actual and expected effects of tighter credit conditions on economic activity, labor market, and inflation. The review of supervision and regulation by Vice Chair Barr is underway to identify what went wrong and implement preventive policies. Powell emphasized that the Fed will balance its objectives of reducing balance sheets and providing financial support as needed and assured that depositors' savings in the banking system are safe.
In this section, Chair Powell addresses recent difficulties in the banking sector and the Federal Reserve's actions in response. He assures that the banking system is safe and sound, with the Federal Reserve prepared to use all tools as needed to maintain its safety. On the broader economy, inflation and the labor market remain major concerns, with high inflation causing hardship and subdued growth projected to continue. Despite this, the labor market remains tight, with job gains picking up in recent months. However, with job vacancies still high, upward pressure on wages and prices persists. The median projection for total PCE inflation for this year is 3.3 percent.
In this section, Fed Chair Powell discusses inflation and the Fed's mandate to promote maximum employment and stable prices. While inflation has been elevated, longer-term inflation expectations remain well anchored and the Fed is committed to returning inflation to its 2 percent objective. The Committee raised the target range for the federal funds rate by 1/4 percentage point, bringing the range to 4 to 5 percent, but events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, making it too soon to determine how monetary policy should respond. The Fed will continue to closely monitor data and assess the actual and expected effects of tighter credit conditions on economic activity, the labor market, and inflation, with policy decisions reflecting that assessment.
In this section, Chair Powell discusses the decision to move ahead with a 25 basis point hike and changing the guidance from ongoing rate hikes to some additional hikes that may be appropriate due to the stronger-than-expected intermeeting data on inflation and the labor market. The events of the past two weeks are likely to result in some tightening credit conditions and weigh on demand, labor market, and inflation. This tightening in financial conditions would work in the same direction as rate tightening and contribute to a significant tightening in credit conditions. The focus will be on the incoming data and the evolving outlook, particularly on the actual and expected effects of credit tightening.
In this section, Chair Powell of the Federal Reserve is asked about the potential use of other tools to achieve tighter financial conditions without damaging the banking sector. Powell responds by stating that they believe the monetary policy tool works, and that rate hikes were well-telegraphed to the market and many banks have managed to handle them. Powell is then asked about the role of the Fed in the internal investigation into its supervision and regulation, to which he states that Vice Chair Barr is leading the review, and while he gets briefed on it, he is not involved in the work of it. Finally, Powell is asked about disinflation and the credit crunch, to which he states that disinflation is still occurring in the US today, and while there is a great deal of literature on the connection between tighter credit conditions, economic activity, hiring, and inflation, it's really just a question of not knowing at this point how significant it will be and how sustainable it will be.
In this section, Chair Powell discusses the review of supervision and regulation that the Fed is conducting following the failure of Silicon Valley Bank. He states that they need to identify what went wrong and assess the right policies to put in place so that it doesn't happen again, and that Vice Chair Barr is leading this review. Powell highlights the need to strengthen supervision and regulation, but reassures that the weaknesses were isolated and not broadly spread through the banking system. Additionally, he responds to questions about the Fed's baseline expectations for interest rates this year and notes that policy will reflect what actually happens, but participants do not see rate cuts this year in the most likely case. Powell emphasizes the key is to have policy tight enough to bring inflation down to 2 percent over time, and it doesn't all have to come from rate hikes as it can come from tighter credit conditions.
In this section, Chair Powell addresses concerns about financial instability risks in the commercial real estate market and loans that will begin to roll over, stating that the banking system is strong and resilient, and not at all comparable to the Silicon Valley Bank situation. He also emphasizes the Federal Reserve's responsibility for price stability and states that they will get inflation down to 2 percent in time, and that the fiscal impulse is not what is driving inflation right now. Additionally, Powell addresses questions about the Fed's involvement in providing financial supports and the FDIC guarantee of uninsured depositors, as well as the possibility of additional rate hikes if needed to combat inflation. Finally, he addresses questions about the balance sheet and financial support from the Fed potentially being at odds with reducing the balance sheet, stating that the Fed will balance these objectives as necessary.
In this section of the FOMC press conference, Chair Powell explained that while the recent liquidity provision has increased the size of the balance sheet, it is not intended to directly alter the stance of monetary policy, but is temporary lending to banks to meet liquidity demands. As for the distribution of reserves, they do not see themselves as running into reserve shortages. In response to a question about the recent failures of non-bank financial institutions, Powell says that the purpose of the review being conducted is to try to understand how it happened and how they can do better and what policies need to be changed. When asked about depositors' savings in the banking system, Powell states that depositors should assume that their deposits are safe and that they have tools to protect depositors when there's a threat of harm to the economy or financial system.
In this section, Chair Powell addresses concerns around the increasing unemployment rate, highlighting that it is difficult to predict how a recession will unfold. While the models used to understand such events work in a linear way, recessions tend to be nonlinear, making projections challenging to get right. However, Powell asserts that bringing inflation down is essential to ensuring long-term benefits for the people served by the bank, including strong labor markets, higher wages for low earners, and a more buoyant economy. Powell also notes that there is the possibility of a soft landing for the US economy despite recent events, but it's too early to tell whether there have been any significant changes in the short term.
In this section of the transcript, Chair Powell discusses the ongoing review under Vice Chair Barr's leadership and how it will ensure banks comply with any citations issued. He refrains from giving his own thoughts, stating that he wants the review to find out what happened, figure out what can be done to do better, and implement those changes. Powell views financial conditions as having tightened, likely more than traditional indexes indicate, and notes that research shows the potential for a significant macroeconomic effect if sustained. He mentions that while rate cuts are not in their base case, they would factor in any significant effects and make policy decisions accordingly.
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