‘Sound, resilient’ banking system played role in keeping interest rates steady, Fed indicates

“The U.S. banking system is sound and resilient,” the Federal Reserve’s rate-setting committee said Wednesday, pointing to that fact (among others) to make no changes to interest rates, at least for now.

Additionally, the leader of the Fed’s board indicated the agency is keeping a close eye on commercial real estate markets and bank investment.

In noting the soundness of the banking system, the Fed’s Open Market Committee (FOMC) echoed a finding reached and released by the national bank regulator, the Office of the Comptroller of the Currency (OCC), in its semiannual risk perspective for spring 2023, also Wednesday. In that report, the OCC said the overall strength of the federal banking system is sound.

The FOMC decided Wednesday to leave its target range for the federal funds rate at 5% to 5.25%, no change from the previous month. That’s the first time in 15 months that the committee has made no changes to interest rates.

The committee acknowledged that tighter credit conditions for households and businesses “are likely to weigh on economic activity, hiring, and inflation.” The committee also said that the extent of these effects remains uncertain and that it remains “highly attentive to inflation risks.”

However, the committee also signaled that further rate hikes are possible, perhaps has early as next month. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” it said in its statement issued after its meeting, which started Tuesday and ended Wednesday. “The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

In response to a reporter’s question during a press conference following the FOMC meeting, Fed Board Chair Jerome H. (“Jay”) Powell said the Fed is watching commercial real estate carefully. “There is a substantial amount of commercial real estate in the banking system,” Powell said, “especially among smaller banks.” He said some banks will have larger concentrations and could experience larger losses as a result. However, he indicated that the issue “will be around for some time” and that the Fed can use its tools, including rate setting, to deal with it over that time.

Federal Reserve issues FOMC statement