BANK, CREDIT RISKS DROPPED
Those risks were brought home on Wednesday when New York Community Bank announced an unexpected loss, an echo of banking troubles last spring that the Fed hopes have been put to rest. The latest policy statement from the central bank’s Federal Open Market Committee (FOMC), however, removed language, put in place following the failures in 2023 of Silicon Valley Bank and other lenders, that said the banking system is “sound and resilient” — a fact that in normal times would not need to be stated.
The Fed also dropped references to the uncertain impact of tight credit on households and businesses and the “lags” with which changes in monetary policy are felt in the economy, a hint that US central bankers feel the current best-case outcome may endure absent some sort of unexpected shock.
Overall, the changes made to the policy statement codify what has been a developing Fed “pivot” that ends roughly two years in which the central bank’s bias has been towards moving rates higher and the risks seen as tilted towards those posed by escalating prices.
“Our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Mr. Powell said.
Risks to the Fed’s dual employment and inflation goals “are moving into better balance,” the Fed’s policy statement said. “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
By contrast, the Fed’s prior statement, issued on Dec. 13, had laid out the conditions under which it would consider “any additional policy firming,” language that excluded any consideration of rate cuts.
Fed officials did not issue new economic projections at their meeting this week. As of the Dec. 12-13 meeting, policy makers envisioned cutting the policy rate by 75 basis points over the course of this year, an outlook that will be updated at the Fed’s meeting in March. —