Federal Reserve Board Chairman Jerome Powell speaks during a press conference at the Federal Reserve in Washington, DC, on March 22, 2023.
Olivier Douliery AFP Getty Images
Federal Reserve Chairman Jerome Powell said Wednesday that the US banking sector is strong but the recent failure of several regional banks could have a ripple effect that weakens the economy.
At a press conference after the latest Federal Open Market Committee meeting, Powell described the banking system as “sound and resilient” but said the central bank is monitoring changes in the availability of credit to consumers and businesses.
“Financial conditions seem to be tightening, and perhaps more so than the traditional indices are saying…” Powell said.
“We will look at how serious this is and whether it looks like it will continue. And if it is, it could easily have a significant macroeconomic effect, and we will consider that decision,” he said. .
The Fed raised its benchmark interest rate by a quarter of a percentage point on Wednesday, but its projections call for only one more hike for the remainder of the year. The central bank chief said that tighter financial conditions due to tighter lending decisions by banks could have the same effect as Fed hikes.
Powell’s comments come after regional banks have come under significant pressure this month. Silicon Valley Bank collapsed, becoming the second biggest failure in US history, in part because rapidly rising interest rates reduced its bond portfolio and created huge paper losses for the bank.
SVB’s management has “failed miserably” to manage interest rate risk, while other banks have been able to cope with the rise, Powell said.
Other banks included The first republic and PacWest have seen significant outflows of deposits. The Fed set up a new Bank Term Funding Program to help banks access cash, but stocks for regional banks fell in volatile trade since the facility was created on March 12.
Powell said deposit flows have stabilized over the past week and Americans should be confident their money is safe, though he stopped short of saying all deposits are now guaranteed.
“What I am saying is that you have seen that we have the tools to protect depositors when there is a dangerous threat to the economy or the financial system, and we are ready to use those tools. assuming that the deposit is safe,” he said.
The collapse of Silicon Valley Bank has led to more scrutiny on the Federal Reserve’s supervisory role over banks, especially from Senator Elizabeth Warren (D-MA).
The Fed is conducting an internal review of potential regulatory issues surrounding SVB, led by Vice Chairman of Supervision Michael Barr, and Powell said he also expects an investigation from outside the central bank.