Federal Reserve economists were projecting a "mild recession" when the US central bank decided to further raise interest rates last month, according to the minutes of the meeting published Wednesday.

 

 

 WASHINGTON: Federal Reserve economists were projecting a "mild recession" when the US central bank decided to further raise interest rates last month, according to the minutes of the meeting published.

"The staff's projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years," according to the minutes.

Members of the Fed's policy-setting committee voted unanimously last month to raise its benchmark lending rate for a ninth time in just over a year, the minutes showed, as they sought to balance curbing high inflation and averting further banking sector upheaval following the rapid collapse of Silicon Valley Bank (SVB).

The quarter-point increase, which was in line with expectations, lifted the Fed's interest rate target to between 4.75 and 5 percent, with the Federal Open Market Committee (FOMC) adding in a statement that "some additional policy firming may be appropriate" to help bring inflation down to the Fed's target of two percent.

All members of the FOMC favored the quarter-percentage-point rise last month, according to minutes.

But "several participants" had considered holding interest rates steady due to the turbulence in the banking sector unleashed by SVB's collapse, the Fed said in a statement on Wednesday.

Some members had also noted that they would have pushed for a larger hike of 50 basis points, "in the absence of the recent developments in the banking sector."

Since the Fed's decision, the economic picture has improved somewhat, with the personal consumption expenditures (PCE) price index -- the Fed's favored measure of inflation -- slowing to an annual rate of five percent in February.

Much of the market turbulence unleashed by SVB's collapse has also receded, with the VIX index down more than 30 percent over the last month.

That lower metric, which is often used to gauge the level of market volatility, suggests traders see less risk in the financial markets.

The U.S. Federal Reserve is likely to need at least two more interest-rate hikes, lifting the benchmark rate to above 5%, to slow an unexpectedly strong labor market seen as contributing to high inflation.

That was the betting in financial markets on Friday after the U.S. Labor Department reported employers added more than half a million jobs last month, far more than expected, and the unemployment rate fell to 3.4%, the lowest in more than 50 years.

The Fed earlier this week increased its benchmark rate by a quarter-of-a-percentage-point to 4.5%-4.75%. Fed Chair Jerome Powell said that with the labor market still tight he expects to need “ongoing” increases to get monetary policy “sufficiently restrictive” to engineer a more balanced job market and bring down too-high inflation.

Interest-rate futures prices, initially skeptical of that view, now reflect that expectation, with a better than even chance seen that the Fed will continue get its policy rate to the 5%-5.25% range by June, if not by May.

Financial markets had earlier heard Powell’s repeated references to the start of a dis-inflationary trend as signalling that just one more rate hike, in March, could suffice.

“This is the kind of report that you want to see when coming out of a recession to signal strength in the economy, not when the futures market is looking at the Fed finishing its rate hike cycle,” said Quincy Krosby, chief global strategist at LPL Financial.

Traders still expect the Fed to cut rates later in the year, despite Powell saying he does not expect inflation to fall fast enough to allow such a thing.

The Fed targets 2% inflation, now running at 5% by the Fed’s preferred measure, the personal consumption expenditures price index.

Friday’s Labor Department report did show slower growth in average hourly earnings to a 4.4% pace, from an upwardly revised 4.8% in December.

“While the Fed welcomes any signs of easing wage pressures, the pace of growth in average hourly earnings is still too strong to help lower inflation,” Oxford Economics’ Ryan Sweet wrote.