FOMC Minutes: Staff Forecasts Called for a Mild Recession Starting Later This Year

The Federal Open Market Committee (FOMC) published the Minutes of the meeting held on March 21 and 22, which barely raised movements in the foreign exchange market. According to the document, staff forecasts included a “mild recession starting at the end of this year, with a recovery in the following two years.”

In March, the Federal Reserve (Fed) raised interest rates by 25 basis points, to 4.75% – 5.0%, as expected amid the banking turmoil. Since the meeting, bank fears have subsided and inflation data released on Wednesday shows the Consumer Price Index slowed to 5% in March, the lowest level since May 2021; however, the underlying rate rose to 5.6%. The Minutes showed that some Fed officials would have considered a 50 basis point rate hike in the absence of developments in the banking sector.

Notable Statements from the Minutes:

“Given their assessment of the potential economic effects of recent events in the banking sector, the staff projection at the time of the March meeting included a mild recession beginning later this year, with a recovery in the following two years. “.

“In assessing the economic outlook, participants noted that, since their February meeting, data on inflation, employment and economic activity had generally been better than expected. They also noted, however, that developments in the banking sector that had occurred late in the intersessional period affected their views on the economic and policy outlook and the uncertainty surrounding those prospects.”

“Participants agreed that the labor market remained very tight.”

“Some participants noted that given the persistence of high inflation and the strength of recent economic data, they would have A 50 basis point increase in the target range is considered appropriate at this meeting, absent recent developments in the banking sector. However, due to the possibility that developments in the banking sector could tighten financial conditions and affect economic activity and inflation, they considered it prudent to increase the target range by a smaller increment at this meeting.”

“Members agreed that the US banking system is strong and resilient. They also agreed that recent events are likely to result in a tightening of credit conditions for households and businesses and will weigh on economic activity, the hiring and inflation, but that the extent of these effects was uncertain. Members also agreed that they remained very vigilant about inflation risks.”

Market reaction:

The Dollar remains at session lows, with the Dollar Index heading towards the lowest close since early February, down 0.65%. EUR/USD rallied to test the 1.1000 area. US yields were flat, with the 10-year yield hovering around 3.43% and the 2-year yield modestly below 4%.