The U.S. is expected to enter a recession this year due to effects from recent turmoil in the banking industry, according to a new projection disclosed by the Federal Reserve.
Minutes from a March meeting of the Federal Reserve, which manages the U.S. economy, said staff have projected “a mild recession starting later this year, with a recovery over the subsequent two years.” The estimate was based on an “assessment of the potential economic effects of the recent banking-sector developments.”
The minutes also said staff noted that “recessions related to financial market problems tend to be more severe and persistent than average recessions.”
The fate of the economy could “be tilted to the upside” if broader effects from banking turmoil “abate quickly,” but would be “skewed to the downside” if the effects “deteriorate more than assumed,” according to the minutes.
In March, the collapse of Silicon Valley Bank – the largest U.S. bank to fail since the 2008 financial crisis – triggered a wider panic, prompting the U.S. government and other partners to swoop in with hundreds of billions of dollars to calm the markets.
SVB and another failed bank were taken over by the government, and the second-biggest Swiss bank, Credit Suisse, is now set to be absorbed by its top rival after facing a bank run.
The Federal Reserve’s meeting minutes show that some officials believe the developments will lead banks to “tighten lending standards” due to “rising funding costs and increased concerns about liquidity.”
Meeting participants said it was too soon to judge the effects of credit tightening, but noted that some banks key to small business lending had “come under significant stress,” according to the minutes.
After the meeting minutes were released on Wednesday, Wall Street stocks slid slightly, with the S&P 500 and Nasdaq Composite each closing lower than they had on Tuesday by less than 1 percent each, Financial Times reported.