Fed staff expects banking crisis to cause a recession this year

Written by on April 13, 2023

Fed staff expects banking crisis to cause a recession this year
Bloomberg Creative/Getty Images

(WASHINGTON) — The Federal Reserve’s staff is more worried about the U.S. economy tipping into a recession after the recent banking crisis, the minutes from the central bank’s meeting in March reveal.

Economists at the Federal Reserve said they expect a “mild” recession later this year, an escalation from their previous assessment.

“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,” according to the publicly posted minutes from the meeting, which took place over March 21-22 right after the collapse of Silicon Valley Bank and Signature Bank.

The comments from economists on staff within the Federal Reserve reflect a dimmer outlook than public statements from Chairman Jerome Powell, who said after that March meeting “we don’t know” whether there will be a recession.

While several economists, including the International Monetary Fund, have said the U.S. and global economies face a higher risk of recession after the recent bank failures, the Biden administration has painted a rosier picture, with Treasury Secretary Janet Yellen saying she does not anticipate a “downturn” in the U.S. economy.

“I wouldn’t overdo the negativism about the global economy,” she said Tuesday. “I think countries have proven resilient, and a number of emerging-market and lower-income countries continue to show resilient growth.”

Speaking with reporters in Dublin, White House press secretary Karine Jean-Pierre argued that economic indicators say “we are not headed to a recession or pre-recession.”

“Recent economic indicators are not consistent with a recession or even a pre-recession. And you can just look at the data: Twelve-point-five million jobs have been created since he took office — twelve-point-five million jobs. We’ve gained all the jobs lost during the pandemic and created three million more jobs. And so, unemployment is a near 50-year low and black unemployment is at a record low. Annual inflation has fallen over the last nine months,” she said.

Silicon Valley Bank, the nation’s 16th largest bank, collapsed in March and was taken over by the government. Signature Bank, the 29th-largest bank in the U.S., followed suit just days later, marking the largest bank failure since the 2008 crisis.

Despite the troubling outlook from Federal Reserve staff, the central bank has aimed to curb inflation. In February, year-over-year inflation was 6%. The data released on Wednesday marked the ninth consecutive month of smaller price hikes.

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