Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, DC, on March 22, 2023.
Olivier Douliery | AFP | Getty Images
Federal Reserve Chair Jerome Powell said Wednesday that the U.S. banking sector is strong but that the recent failure of some regional banks could cause ripple effects that slow down the economy.
At a press conference after the latest Federal Open Markets Committee meeting, Powell described the banking system as “sound and resilient” but said the central bank was monitoring a change in the availability of credit for consumers and businesses.
“Financial conditions seem to have tightened, and probably by more than the traditional indexes say. … The question for us though is how significant will that be — what will be the extent of it, and what will be the duration of it,” Powell said.
“We’ll be looking to see how serious is this and does it look like it’s going to be sustained. And if it is, it could easily have a significant macroeconomic effect, and we would factor that into our policy decisions,” he added.
The Fed hiked its benchmark interest rate by a quarter of a percentage point on Wednesday, but its projections called for just one more hike over the rest of the year. The central bank chief said that tighter financial conditions caused by more stringent lending decisions from banks could have a similar impact as further hikes from the Fed.
Powell’s comments come after regional banks have come under significant pressure this month. Silicon Valley Bank collapsed, making it the second largest failure in U.S. history, in part because the rapid rise in interest rates devalued its bond portfolio and created large paper losses for the bank.
SVB’s management “failed badly” in managing its interest rate risks, while other banks have managed to handle the hikes, Powell said.
Other banks including First Republic and PacWest have seen significant outflows of deposits. The Fed set up a new Bank Term…
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