FOMC minutes: Staff’s projections included a mild recession starting later this year

The Federal Open Market Committee (FOMC) released the minutes of the March 21-22 meeting, spurring little action across the FX board. According to the document, staff’s projections included a “mild recession starting later this year, with a recovery over the subsequent two years”. 

In March, the Federal Reserve (Fed) raised the key interest rates by 25 basis points to 4.75% - 5.0%, as expected amid banking turmoil. Since the meeting, banking concerns eased and inflation data released on Wednesday showed the Consumer Price Index slowed to 5% in March, the lowest since May 2021; however, the Core rate edged higher to 5.6%. The minutes showed that some Fed officials would have considered a 50 basis point rate hike in the absence of the developments in the banking sector. 

Key quotes from the minutes: 

"Given their assessment of the potential economic effects of the recent banking-sector developments, 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."

"In assessing the economic outlook, participants noted that since they met in February, data on inflation, employment, and economic activity generally came in stronger than expected. They also noted, however, that the developments in the banking sector that had occurred late in the intermeeting period affected their views of the economic and policy outlook and the uncertainty surrounding that outlook."

"Participants agreed that the labor market remained very tight."

"All participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points to 4¾ to 5 percent. All participants also agreed that it was appropriate to continue the process of reducing the Federal Reserve’s securities holdings."

"Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting. They noted that doing so would allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy. However, these participants also observed that the actions taken by the Federal Reserve in coordination with other government agencies helped calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation."

"Some participants noted that given persistently high inflation and the strength of the recent economic data, they would have considered a 50 basis point increase in the target range to have been appropriate at this meeting in the absence of the recent developments in the banking sector. However, due to the potential for banking-sector developments to tighten financial conditions and to weigh on economic activity and inflation, they judged it prudent to increase the target range by a smaller increment at this meeting."

"Members concurred that the U.S. banking system is sound and resilient. They also agreed that recent developments were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation, but that the extent of these effects was uncertain. Members also concurred that they remained highly attentive to inflation risks."

Market reaction: 

The US Dollar remains at session lows, with the Dollar Index headed toward the lowest close since early February, down 0.65%. EUR/USD rose to test the 1.1000 area. US yields held steady, with the US 10-year around 3.43% and the 2-year slightly below 4%.