By Howard Schneider
WASHINGTON (Reuters) – Detailed minutes of the U.S. Federal Reserve’s meeting last month due out Wednesday may show just how close the central bank came to postponing further interest rate increases following the failure of two U.S. banks in the days leading up to the session.
The Fed ultimately raised the benchmark federal funds rate a quarter of a point at its March 21-22 meeting, a policy gathering held less than two weeks after a tense weekend that top U.S. officials spent designing emergency measures to halt a possible deposit run against regional lenders following the failures of Silicon Valley Bank and Signature Bank.
At a press conference following the meeting, Fed Chair Jerome Powell said a pause was considered, but policymakers ultimately judged they could respond to different problems with different tools: higher interest rates to continue fighting inflation while relying on oversight and liquidity programs to keep the financial system stable.
Citi analysts Andrew Hollenhorst and Veronica Clark said they expect the minutes, released at 2 p.m. EDT (1800 GMT), to reflect a balancing act that is likely to continue as officials prepare for the next meeting of the Federal Open Market Committee on May 2-3. Another quarter-point increase is expected, but policymakers have also said they are watching banking data closely for signs of stress or a larger-than-anticipated drop in lending.
Before SVB’s March 10 failure, Powell had said high inflation might even warrant a half-point increase, so the quarter-point increase that was approved showed “that the Fed was taking the situation seriously…but also that the situation was not so dire as to prevent the Fed from following through on previously signaled tightening,” the Citi analysts wrote. The minutes “will likely express confidence in the separability of price stability and financial stability.”
The Silicon Valley Bank failure was the largest bank collapse since the 2007 to 2009 financial crisis, and raised at least the possibility of fast-spreading financial contagion if other regional lenders started losing deposits faster than they could be covered.
A new Fed emergency lending program for banks and a U.S. government decision to prevent depositor losses at those banks, even beyond the standard Federal Deposit Insurance Corporation limits, seemed to stabilize the situation.
Still, the events on that March 10 weekend added new complexity to a Fed policy debate that had been singlemindedly focused on lowering inflation from levels that last year were more than triple the Fed’s 2% target.
New consumer price index data released Wednesday is expected to show headline inflation falling, but with a still-high level of underlying or “core” inflation likely to concern Fed policymakers.
In a nod to how far the central bank had progressed in tightening monetary policy since its initial rate increase in March 2022, the Fed did drop from its statement last month language saying that “ongoing increases” in rates were likely, instead saying that “some further” tightening was likely.
Details around that decision would also provide insight into how close the Fed may be to an endpoint in its current hiking cycle, which has raised the policy rate from near zero a year ago to a range between 4.75% and 5%, the highest since October 2007 when the Fed was cutting rates in response to a developing financial crisis.
(Reporting by Howard Schneider; Editing by Andrea Ricci)
