The Federal Reserve said tighter US credit conditions following bank failures in March may weigh on growth and that the extent of additional monetary policy tightening will depend on incoming data.
(Bloomberg) — The Federal Reserve said tighter US credit conditions following bank failures in March may weigh on growth and that the extent of additional monetary policy tightening will depend on incoming data.
“The FOMC will determine meeting by meeting the extent of additional policy firming that may be appropriate to return inflation to 2% over time, based on the totality of incoming data and their implications for the outlook for economic activity and inflation,” the Fed said in in its semi-annual report to Congress released Friday, referring to the Federal Open Market Committee.
“Bringing inflation back to 2% will likely require a period of below-trend growth and some softening of labor-market conditions.” it said.
The Fed report, which provides lawmakers with an update on economic and financial developments and monetary policy, was published on the central bank’s website ahead of Chair Jerome Powell’s testimony before the House Financial Services Committee on June 21. He will appear before the Senate banking panel the following day.
“Evidence suggests that the recent banking-sector stress and related concerns about deposit outflows and funding costs contributed to tightening and expected tightening in lending standards and terms at some banks beyond what these banks would have reported absent the banking-sector stress,” the report said.
Credit tightening “may be larger for sectors that depend more heavily on bank credit, such as the commercial real estate and the small business sectors,” the report said.
The Federal Open Market Committee paused its series of interest-rate hikes Wednesday for the first time in 15 months but policymakers projected two additional quarter-point hikes this year, more than previously expected, in response to surprisingly persistent inflation and labor-market strength.
Policymakers left rates in a range of 5% to 5.25%. The median estimate of Fed participants’ projections is now for rates to rise to 5.6% by the end of this year, up from 5.1% in March.
Powell told reporters after the decision that committee felt it was appropriate to moderate the pace of hikes following the most aggressive hiking in four decades. At the same time, he said that the vast majority of the committee projected more hikes will be needed to tame inflation.
He also stressed that the committee was keeping its options open for the July meeting, which he said was “live” for a policy decision, indicating either a rate increase or a continued pause were both in play.
Officials upgraded their view of economic growth and the labor market for 2023 and are now looking for a rise in unemployment to 4.5% next year. The jobless rate stood at 3.7% in May.
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