Federal Reserve economists predict that turmoil after the collapse of several banks will cause a "mild recession" later this year, according to minutes of the Fed's March meeting.
That forecast has led Fed officials to envision fewer interest-rate increases this year, out of concern that banks will reduce their lending and weaken the economy. The uncertainty in the banking sector also helped Fed officials coalesce around their decision to raise their key interest rate by just 0.25 percentage point, rather than a half-point, despite signs that inflation was still too hot, the minutes reveal.
The minutes, released Wednesday afternoon, note that the Fed's prediction of a recession depends on how severe the banking industry's troubles prove to be and to what extent they will cause a cutback in lending.
Before the collapse of Silicon Valley Bank, many officials said they had expected to raise rates several more times this year. Instead, Fed officials agreed that the collapse of the two large banks "would likely lead to some weakening of credit conditions," as banks sought to preserve capital by curtailing lending to consumers and businesses.
"[T]he FOMC minutes finally showed some signs of a difference of opinions on the path forward for monetary policy, " Jason England, global bonds portfolio manager at Janus Henderson Investors, said in an emailed report, adding, "it appears like they are much closer to a pause than we thought prior to the bank turmoil in early March."