Mar 26, 2023
Fed’s Kashkari Says Bank Strains Bring Risk of Recession Closer
(Bloomberg) -- Federal Reserve Bank of Minneapolis President Neel Kashkari said recent bank turmoil has increased the risk of a US recession but that it was too soon to judge what it means for the economy and monetary policy.
Asked on Sunday during an interview on CBS’s “Face the Nation” if the strains could tip the country into a recession, he said, “It definitely brings us closer.”
“What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch. Would that slow down the economy? This is something that we’re monitoring very, very closely,” said Kashkari, a voter on monetary policy this year. “It’s too soon to make any forecast about the next interest rate meeting.”
The next meeting of the policy-setting Federal Open Market Committee is May 2-3.
His remarks were more guarded than a trio of Fed officials speaking Friday, who said inflation remained the top priority and could warrant further policy tightening. That could reflect a shift by the Minneapolis Fed chief, who in recent months has been an outspoken hawk favoring rate hikes to cool prices.
Policymakers lifted their benchmark rate by a quarter point on March 22, continuing their battle against high inflation despite uncertainty over how much the economy will be upended following the second-biggest bank failure in US history. The rate increase brought the Fed’s benchmark rate to a target range of 4.75% to 5%.
Officials did step back from their previous firm commitment to keep raising interest rates, saying instead that some additional tightening “may be appropriate” to bring inflation back to the Fed’s 2% target.
The rate move comes after the US government acted to guarantee deposits at two failed firms and after the Fed introduced a new emergency lending program meant to backstop other banks. The Fed also worked to boost international access to dollars by enhancing swap lines with its key central bank counterparts.
Before this month’s bank collapses and market turmoil, Kashkari had said the Fed should lift rates to about 5.4% and then hold them there until inflation cooled. The median projection of the Fed’s 18 officials, updated following their meeting this month, has rates climbing to 5.1%, unchanged from their last projections in December.
That implies one more 25 basis-point rate hike this year, though seven officials had a higher rate peak penciled in.
Kashkari noted that a pullback in bank lending amid the sector’s turmoil right now may help provide some of the tightening that policymakers hope will bring down inflation, potentially leading to fewer interest-rate increases being required.
While the banking system is sound and banks have strong capital positions and a lot of liquidity, it’s going to take time for the current problems to fully work themselves out, he said. Kashkari, a veteran of financial crises, set up and managed the Troubled Asset Relief Program during the early months of the 2008-2009 crisis.
“Sometimes it takes longer for all the stresses to work themselves out of the system,” Kashkari said. “There are some concerning signs. The positive sign is deposit outflows seem to have slowed down. Some confidence is being restored among smaller and regional banks.”
Other banks are also highly exposed to Treasury bonds — which were the precipitating factor for SVB’s collapse — and commercial real estate, which could be problematic, Kashkari said.
An effective shutdown of capital markets in the last two weeks could also cause more pain in the economy, if it persists, he said.
(Updates with further Kashkari comments starting in 11th paragraph.)
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