The banking system is sound and resilient, the interest-rate setting committee of the Federal Reserve Board said Wednesday following action by the panel to raise interest rates by 25 basis points, citing inflation risks – but the chair of the board noted his agency is “carefully monitoring” the banking sector.
“Recent indicators suggest that economic activity has been expanding at a moderate pace,” the Federal Open Market Committee (FOMC) said in a statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.
“The U.S. banking system is sound and resilient,” the statement added. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
In comments to the press after the FOMC meeting, Fed Board Chair Jerome H. (“Jay”) Powell asserted that “things have settled down out there,” regarding the banking sector and compared to the events of March (and later in May) when three banks failed. Those banks were Silicon Valley Bank (SVB) of Santa Clara, Calif.; Signature Bank of New York, N.Y. – both of which failed in March; and First Republic Bank of San Francisco, which failed in May.
Powell noted that banking profits came in strong during the second quarter and that deposits were up. But the Fed chair said his agency is “monitoring carefully” the banking sector. He said the impact of the failure of the three banks “in terms of the actual effect because of their size and business models” that it’s hard to “tease out the effects on this very large economy.”
However, he did affirm that banking and credit conditions are tightening. “That’s an expected result” of increase to interest rates, the Fed chair said.
Federal Reserve issues FOMC statement