Jay Powell Said the Banking System Is “Sound and Resilient.” Now More Banks Are in Trouble.

The Federal Reserve’s Federal Open Market Committee (FOMC) on Wednesday raised the target policy interest rate (the federal funds rate) to 5.25 percent, an increase of 25 basis points. With this latest increase, the target has increased 5 percent since February 2022. This is the highest rate reached since August 2007, shortly before a recession began in December of that year. 

With an increase of only 25 basis points, the May meeting is the third month in a row during which the Fed has pulled back from its more substantial rate hikes of 2022. After four 75-basis-point increases in 2022, the committee approved a 50-point increase in December, followed by 25-point increases in February and March, and another on Wednesday. 

Although CPI inflation has remained at or above five percent in recent months the FOMC has slowed down in its monetary tightening over the past four months. This is spite of the fact Powell today characterized price inflation as “well above” the two-percent target while concluding the Fed “has a long way to go” in terms of getting price inflation under control. Nonetheless, indications continue to mount that the Fed is maintaining its drift toward more dovish policy.

This was apparent in Powell’s comments on the state of the economy on Wednesday. The Fed uses most indications of economic weakness as excuses to embrace monetary easing, and the Fed now increasingly points to weakening growth. In his remarks, Powell said “the US economy slowed significantly last year” while noting the pace of growth “continued to be modest” into the spring. Although Powell, as usual, pointed to “strong” job growth numbers, he did not present this as a clear indicator of the overall economy. Instead, the discussion turned toward the Fed’s economic forecasts which, according to Powell, point to a “mild recession.” Sticking to the usual script however, Powell emphasized the word “mild” and predicted employment losses as a result of a coming recession would be “smaller than is typical in recessions.” Given that the Fed has demonstrated no prescience whatsoever in terms of forecasting inflation rates or economic growth in recent years, it’s unclear as to what gives Powell the confidence to make such a precise prediction.

The FOMC’s press release text also points toward a policy turn away from monetary tightening. For example, in March’s press release, the FOMC noted:

The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.

In contrast, this i