The minutes of the US Federal Open Market Committee (FOMC) meeting held on March 21–22 were released on April 12. The minutes showed how concerned the Fed staff advisors were about the ongoing banking crisis in early March. A direct impact of the banking crisis is a scenario leading up to the credit crunch. It is now abundantly clear that the Fed experts anticipated a modest recession to begin later this year, followed by a recovery over the following two years, at the time of the March meeting.
Even as the economy has started showing signs of cooling down, the biggest challenge for the Fed remains the core-inflation numbers which remain sticky as of now. Dealing with the banking crisis means pushing back credit from the economy leading to a recessionary environment. Some sections of the economy will see a hit as the Fed goes into the last stage of its fight against inflation.
Ethan Harris, Head of Global Economics, BofA Global Research shares his views on the recessionary environment ahead:
‘Uncertainty’ was the key theme of the March FOMC minutes. Policymakers are focused on credit tightening, which is expected ‘to weigh on economic activity, hiring, and inflation.’ Like the March FOMC meeting, the minutes offer little forward guidance, suggesting that the Fed is in the ‘wait and see’ mode. This makes sense from a risk management perspective: there is growing evidence that we are close to the end of the hiking cycle, but turning points are hard to see in real-time.
Another takeaway from the minutes is that the base case in the staff’s economic outlook is now a mild recession, starting later this year. This is a change from the February minutes, which stated that a recession was ‘a plausible alternative to the baseline’. The new staff forecast appears to be roughly in line with our base case that a mild recession will start in 3Q 2023.