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Written by Michael S. Darby and Dan Barnes
(Reuters) – A Federal Reserve report released on Friday pointed to a range of issues deemed “significant” vulnerabilities in financial markets, while stressing that roiled the banking sector a year ago. He added that it has faded considerably.
The Fed also used the latest release of its periodic monetary policy report to say that officials will not begin lowering their short-term interest rate target until they have greater confidence that inflation is indeed returning to their 2% target. Ta.
In its report, the central bank cited a number of ways that borrowing levels and leverage are increasing risks in the financial sector. He also said the stock price is “close to historic highs.” The Fed said hedge fund leverage remains high and stable, while life insurance companies face increased reliance on nontraditional funding sources.
Meanwhile, banks’ funding sources remain liquid and stable, but funding costs have increased, the central bank said. However, despite these growing challenges, the Fed report said that “the banking system remains healthy and resilient” and that “severe stress in the banking system has receded since last spring.” .
A year ago, the Fed grappled with banking problems so large that it was forced to launch new liquidity facilities as the central bank’s demand for credit soared. Much of that borrowing has faded as a major concern for markets and central banks, and the Fed this month plans to end the bank term funding program it set up to address the problem.
The Fed’s report says credit remains available to most people who want it, acknowledges that borrowing costs are high, and says, “Credit card and auto loan interest rates have both increased significantly since the last monetary policy tightening cycle. “This is still higher than the peak level in 2018.”
On the economy, the Fed reiterated that it is committed to bringing inflation pressures back on target, with the Federal Open Market Committee, which sets interest rates, saying, “Until we have high confidence that inflation is rising, I don’t think it’s appropriate to lower the rate.” We are making sustained progress towards 2%. ”
The Fed’s outlook from the end of last year was backed up by comments from officials, all of which suggested rate cuts this year as inflation pressures ease. However, given the strength of the economy and the uneven path to recovery to 2%, market expectations for the start of easing are likely to be sometime in the summer.
Prelude to Powell
The Fed’s biannual report to Congress will be released ahead of two days of testimony from Fed Chairman Jerome Powell scheduled for next Wednesday and Thursday. Mr. Powell is likely to face a barrage of questions from lawmakers about the Fed’s tightening policy stance and expectations for easing, a sensitive topic in a presidential election year.
The report summarizes economic developments and actions the Fed has taken since the last update given to lawmakers. The Fed’s concerns about financial market vulnerabilities were already noted in last week’s release of the January FOMC meeting minutes.
At the Federal Reserve’s most recent policy meeting, held in January, central bank staff briefed policymakers on their assessment of stability within the U.S. financial system, and the minutes state that the staff “assessed the system’s financial vulnerabilities.” “characterized as having a pronounced gender.”
Many Democrats are already cornering Mr. Powell over high interest rates, complaining that they make already poor housing even more unaffordable for low- and moderate-income households. Republicans, on the other hand, have criticized the Fed for its initial slow response to inflation and could criticize Mr. Powell for suggesting he could cut interest rates ahead of the November election.
election year rate cuts
The Fed’s next rate-setting meeting is scheduled for March 19-20, and policymakers are widely expected to keep the benchmark interest rate unchanged at 5.25% to 5.5%, the highest level since July.
The next meeting will also include updated forecasts for inflation, employment, growth and interest rates. The Fed decided to cut interest rates three times in December, and New York Fed Chairman John Williams said in comments to reporters Wednesday that the outlook is a “reasonable” place for Fed officials to think about the outlook for monetary policy. He said that.
However, questions remain about the timing of the action. Financial markets had initially indicated interest rate cuts at the March meeting following strong inflation data through the second half of 2023, but the first inflation indicators of 2024 suggest that at least some of the momentum to slow the pace has been lifted. I stopped it temporarily. About price increases.
Although market prices currently reflect the general view that the first rate cut will occur in June, there is no possibility that the first rate cut will occur at the April 30-May 1 meeting. isn’t it.
(Reporting by Michael S. Darby, Ann Safir, Lindsey Dunsmuir and Pete Schroeder; Editing by Nick Zieminski)
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