The sure-footed Fed of the past year now in doubt about next policy move
Adds background, new research on lending effects
By Howard Schneider
WASHINGTON, March 23 (Reuters) -For the first time in a year the Federal Reserve has left its next policy step in doubt as officials weigh the risks of continued high inflation against a possibly looming U.S.credit crunch that could slow the economy in sharp and potentially unexpected ways.
Walking a narrow line that could leave financial markets both unsettled and guessing about what's next, Fed Chair Jerome Powell said in a news conference that U.S. central bankerswill themselves be in the dark until more is known about how banks might change lending in response to the failure of two regional firmscaught out by unexpected deposit runs.
The Fed raised its benchmark overnight interest rate by a quarter of a percentage point on Wednesday, the ninth straight policy meeting that ended with a rise in borrowing costs since the current tightening cycle began in March 2022. But for the first time since then, it opened the door to a possible pause in the tightening, while also keeping its options open for a further increase as well.
"It's really ... a question of not knowing at this point," Powell told reporters after the meeting."How significant will this credit tightening be, and how sustainable? ... This is 12 days ago," that a pair of bank failures reshaped the financial landscape facing the central bank, with potential implications for the real economy and the path of inflation.
Until the March 10 failure of Silicon Valley Bank SIVB.O the higher- and stickier-than-expected path of inflation had warranted steady Fed rate hikes, asingular focus that shaped the policy views of Powell and his colleagues for much of 2022 and several months into 2023.
But uncertainty about the health of thebanking industry has now touched off a scramble by U.S. regulators, lawmakers andpoliticians to figure out if a broader financial crisis is developing and how to tighten supervision and regulation in response.
"For the time being they are still gauging the impact of what is going on," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. The economy "will feel the pain of tighter landing standards and tighter regulation ... I don't think it is going to be immediate."
COMING SLOWDOWN
"Inflation pressures continue to run high," Powell said on Wednesday, repeating what has been the central bank's tagline since the anti-inflation campaign started more than a year ago.
"We remain highly committed to bringing inflation back down," he said, repeating a promise that since March of 2022 has meant steadily higher projected Fed interest rates as inflation escalated.
This week, however, was the first time since early 2021 that officials raised their outlook for year-end 2023 inflation - to 3.3% from the 3.1% projected in December - without offsetting it with higher projected interest rates. The projection for the year-end 2023 benchmark overnight interest rate remained at 5.1%.
The difference is a possible credit crackdown by banks, and "means that monetary policy may have less work to do," Powell said.
"You can think of it as the equivalent of a rate hike ... Perhaps more than that," Powell noted, citing extensive research that made him regard the impact as "potentially quite real."
A decline in the growth rate of U.S. bank lending is a hallmark of recession. If it gets really bad, as it did around the 2007-2009 recession, credit actually contracts and the downturn is all the worse.
Fed officials are watching to see if the U.S. economy hits that middle ground, with the flow of credit slowing and perhaps helping encourage "disinflation," without crashing altogether.
Goldman Sachs on Thursday said the research referred to by Powell pointed to a potential hit to 2023 U.S. gross domestic product growth of three-tenths of a percentage point to half a percentage point as banks slow lending, for example, to rebuild capital buffers pummeled by the drop in the value of some of their assets.
That would be enough to wipe out the median GDP growth projected by Fed officials for this year of 0.4%.
In fact, aspects of the Fed's latest economic projections point not so subtly to recession.
First-quarter economic growth is likely to be strong, with an Atlanta Fed "nowcast" estimating a 3.2% annual growth rate. To get to 0.4% for the year as a whole implies a "sudden stop of activity," argued Tim Duy, chief U.S. economist at SGH Macro Advisors.
Fed officials also see the unemployment rate rising nine-tenths of a percentage point in the remainder of this year. Since the 1950s that much of a rise in unemployment over that short a time has meant a recession.
'CLEAR RECOGNITION'
For now, Powell said he thought the banking sector's problems would be contained to California-based SVB and the smaller New York-based Signature Bank SBNY.O, whose failures were deemed a "systemic risk" by U.S. officials and prompted the Fed to rapidly create a new lending facility for banks facing unusual withdrawal demands.
Those facilities as well as other programs at the central bank are meant to address financial stability concerns so monetary policy can address inflation, which is still running at more than double the Fed's 2% target.
Data on the first full week of borrowing from that facility will be released on Thursday, followed by data on Friday showing the systemwide changes in bank deposits.
In his news conference on Wednesday, Powell said deposit flows from banks appeared to have "stabilized over the last week," even as U.S. money market funds attracted their biggest weekly inflows in nearly three years.
But financial conditions are tightening. A Chicago Fed index encompassing interest rates, credit spreads, and other data has turned higher since the bank failures, and Powell said those sorts of measures may underestimate what's happening because they don't fully account for changes in lending conditions.
After raising rates at a record pace over the past year "there is a clear recognition that it may be time to pause," said Rick Rieder, chief investment officer of global fixed income at BlackRock. "The challenges facing the (Federal Open Market Committee) today ... take on a particular aura of complexity."
Interactive graphic-Unemployment and recessionhttps://graphics.reuters.com/USA-ECONOMY/UNEMPLOYMENT/zdvxdqaygvx/
Graphic-Rising unemployment and recessionhttps://tmsnrt.rs/3LKW9p4
Interactive graphic-Rates and inflationhttps://graphics.reuters.com/USA-FED/INFLATION/egvbkrwedpq/
Graphic-Rates to catch up with inflation? https://tmsnrt.rs/3SaBc72
Interactive graphic-Powell's policy sprinthttps://graphics.reuters.com/USA-FED/FOMC/akpezbwjbvr/
Graphic-Powell's policy sprint https://tmsnrt.rs/3qQdxgq
Interactive graphic-Financial conditions are tighteninghttps://tmsnrt.rs/3TGljHw
Graphic-Financial conditions are tighteninghttps://tmsnrt.rs/42sNbmp
Interactive graphic-Overall bank credithttps://graphics.reuters.com/USA-ECONOMY/BANKS/zdvxdqaeqvx/
Graphic-Overall bank credithttps://tmsnrt.rs/40vb8Yw
Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao
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دستبرداری: XM Group کے ادارے ہماری آن لائن تجارت کی سہولت تک صرف عملدرآمد کی خدمت اور رسائی مہیا کرتے ہیں، کسی شخص کو ویب سائٹ پر یا اس کے ذریعے دستیاب کانٹینٹ کو دیکھنے اور/یا استعمال کرنے کی اجازت دیتا ہے، اس پر تبدیل یا توسیع کا ارادہ نہیں ہے ، اور نہ ہی یہ تبدیل ہوتا ہے یا اس پر وسعت کریں۔ اس طرح کی رسائی اور استعمال ہمیشہ مشروط ہوتا ہے: (i) شرائط و ضوابط؛ (ii) خطرہ انتباہات؛ اور (iii) مکمل دستبرداری۔ لہذا اس طرح کے مواد کو عام معلومات سے زیادہ کے طور پر فراہم کیا جاتا ہے۔ خاص طور پر، براہ کرم آگاہ رہیں کہ ہماری آن لائن تجارت کی سہولت کے مندرجات نہ تو کوئی درخواست ہے، اور نہ ہی فنانشل مارکیٹ میں کوئی لین دین داخل کرنے کی پیش کش ہے۔ کسی بھی فنانشل مارکیٹ میں تجارت میں آپ کے سرمائے کے لئے ایک خاص سطح کا خطرہ ہوتا ہے۔
ہماری آن لائن تجارتی سہولت پر شائع ہونے والے تمام مٹیریل کا مقصد صرف تعلیمی/معلوماتی مقاصد کے لئے ہے، اور اس میں شامل نہیں ہے — اور نہ ہی اسے فنانشل، سرمایہ کاری ٹیکس یا تجارتی مشورے اور سفارشات؛ یا ہماری تجارتی قیمتوں کا ریکارڈ؛ یا کسی بھی فنانشل انسٹرومنٹ میں لین دین کی پیشکش؛ یا اسکے لئے مانگ؛ یا غیر متنازعہ مالی تشہیرات پر مشتمل سمجھا جانا چاہئے۔
کوئی تھرڈ پارٹی کانٹینٹ، نیز XM کے ذریعہ تیار کردہ کانٹینٹ، جیسے: راۓ، خبریں، تحقیق، تجزیہ، قیمتیں اور دیگر معلومات یا اس ویب سائٹ پر مشتمل تھرڈ پارٹی کے سائٹس کے لنکس کو "جیسے ہے" کی بنیاد پر فراہم کیا جاتا ہے، عام مارکیٹ کی تفسیر کے طور پر، اور سرمایہ کاری کے مشورے کو تشکیل نہ دیں۔ اس حد تک کہ کسی بھی کانٹینٹ کو سرمایہ کاری کی تحقیقات کے طور پر سمجھا جاتا ہے، آپ کو نوٹ کرنا اور قبول کرنا ہوگا کہ یہ کانٹینٹ سرمایہ کاری کی تحقیق کی آزادی کو فروغ دینے کے لئے ڈیزائن کردہ قانونی تقاضوں کے مطابق نہیں ہے اور تیار نہیں کیا گیا ہے، اسی طرح، اس پر غور کیا جائے گا بطور متعلقہ قوانین اور ضوابط کے تحت مارکیٹنگ مواصلات۔ براہ کرم یقینی بنائیں کہ آپ غیر آزاد سرمایہ کاری سے متعلق ہماری اطلاع کو پڑھ اور سمجھ چکے ہیں۔ مذکورہ بالا معلومات کے بارے میں تحقیق اور رسک وارننگ ، جس تک رسائی یہاں حاصل کی جا سکتی ہے۔
