Fed Economists See Bank Turmoil Triggering Recession This Year

The recent turmoil in the U.S. banking sector is likely to tip the economy into a mild recession later this year, Federal Reserve officials were told by the central bank’s staff economists last month.

Minutes from the March meeting of the Federal Open Market Committee released Wednesday afternoon indicated that Fed economists forecast a recession beginning later this year. The economy is not expected to fully bounce back until after next year, the minutes show.

“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. Real GDP growth in 2024 was projected to remain below the staff’s estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential,” the minutes report.

The Fed’s staff now see the level of real output to fall below its estimate of potential output in early 2024, more than a year sooner than in the previous projection. The unemployment rate was projected to rise above the staff’s estimate of its natural rate early next year.

The banking sector disruption that led to the collapse of Silicon Valley Bank and Signature Bank also forced Fed officials to rethink the path of interest rates.

“Many participants remarked that the incoming data before the onset of the banking-sector stresses had led them to see the appropriate path for the federal funds rate as somewhat higher than their assessment at the time of the December meeting. After incorporating the banking-sector developments, participants indicated that their policy rate projections were now about unchanged from December,” the minutes report.