Jerome Powell: The Fed needs to strengthen supervision and regulation

A Silicon Valley Bank branch office in downtown San Francisco, California, on March 13. (Kori Suzuki/Reuters)

In response to the collapse of two banks and nearly two weeks of banking turmoil, Fed Chair Jerome Powell said that "it's clear we do need to strengthen supervision and regulation," noting the central bank would doing an internal review.

"At a basic level, Silicon Valley Bank management failed badly," Powell said. "We now know that supervisors saw these risks and intervened ... My only interest is that we identify what went wrong here."

But Powell said the Fed wouldn't jump to conclusions, saying it would be "inappropriate for me at this stage to offer my views on what the answers might be."

What happened to the Fed sticking to its guns and fighting inflation at all costs? Well, the problems in the banking sector may be doing the Fed's work for it, negating the need for more rate hikes, Fed Chair Jerome Powell said Wednesday.

That's because banks may stop lending money to some borrowers, prevent some businesses from getting loans and issue fewer mortgages. That would slow the economy and potentially lead to layoffs and a housing market slowdown.

The Fed, in its fight against inflation, has been trying to do exactly that: Slow the economy. So rate hikes may not be necessary anymore to beat back rising prices. On the other hand, it may not have the desired effect. Powell said the Fed is watching closely.

A pedestrian walks past the Federal Reserve Headquarters on March 21, 2023 in Washington, DC.  (Kevin Dietsch/Getty Images)

The Fed is strongly signaling that its aggressive interest rate hike regime will come to an end soon, citing robust economic conditions and inflation moving lower.

"We no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation," Powell said. "Instead, we now anticipate some additional policy firming may be appropriate."

Powell noted the shift from the Fed's previous stance centers on the words "will" versus "some" and "may." The message is that further rates aren't guaranteed.

"The end of the rate hiking cycle is in sight," said Jamie Cox, managing partner at Harris Financial Group. "The Fed is trying to navigate the very narrow path between defeating inflation and destroying the economy with blunt force rate hikes — even they now know the latter is a very real risk."

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve, today in Washington. (Alex Brandon/AP)

Fed chair Jerome Powell sought to reassure the world that America's banks are, on the whole, healthy.

"Our banking system is sound and resilient with strong capital and liquidity," he said at a news conference Wednesday. "We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound."

The Fed is raising interest rates by 25 basis points, signaling its commitment to fighting inflation despite the failures of Silicon Valley Bank and Signature Bank that sparked a selloff in bank stocks and has left similarly sized banks teetering.

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, DC, today. (Olivier Douliery/AFP/Getty Images)

Fed Chair Jerome Powell, at a press conference Wednesday, said the Fed was committed to maintaining confidence in the banking sector.

Powell said that threat is why US regulators worked to restore confidence by extending emergency lending to banks and increasing the availability and flow of dollars across the world. He noted that some banks currently have "unusual funding needs" as customers withdraw deposits, and the Fed's programs have effectively helped banks get the cash they need to stay afloat.

Wednesday's decision from policymakers to hike rates for the ninth consecutive time was unanimous. No policymaker has voted against a decision since June last year.

Fed officials raised overnight lending rates to a range of 4.75% to 5%, their highest level since September 2007. That sends a clear message that restoring price stability remains a top priority.

This was the first vote for the committee's newest member, Chicago Federal Reserve President Austan Goolsbee.

Traders work on the floor of the New York Stock Exchange on March 22. (Michael M. Santiago/Getty Images)

Stocks teetered Wednesday afternoon as Fed Chair Jerome Powell took the stand at the central bank's post-meeting press conference.

The Dow fell about 0.5%. The S&P 500 fell about 0.7%. The Nasdaq Composite slipped about 0.3%.

The 2-year Treasury yields extended their slide, after rising in recent days.

The central bank's rate hike was in line with traders' expectations. Stocks initially rose on the news before teetering as Powell reaffirmed the Fed's dedication to achieving price stability.

The central bank also revised its economic outlook and now expects the US economy to grow by 0.4% this year and unemployment to rise to 4.5%, up from the current 3.6% rate.

This could put pressure on the Fed's dual mandate to battle inflation while keeping unemployment down.

The Federal Reserve headquarters are pictured on March 21 in Washington, DC.  (Kevin Dietsch/Getty Images)

Goldman Sachs expected the Fed would not hike rates today. That forecast didn't come true. But the Wall Street bank now believes the Fed will have a difficult path ahead to keep both the economy and the banking sector healthy.

“Despite the Fed pressing ahead with a [quarter-point] rate hike today, we see considerable uncertainty in the path ahead and would downplay the significance of updated economic ... projections in such a fast-moving environment," said Ashish Shah, Goldman's chief investment officer of the company's public investing business.

Shah said Goldman believes the Fed will be forced to make decisions about rates and other policies based on both the banking sector and data about the economy. 

"Concerns over capital constraints can fast change the economic outlook," Shah noted. Although Goldman believes more rate cuts could come in the future, it predicts the Fed will pause for a bit. The Fed, similarly, predicted Wednesday that rates will be exactly the same at the end of the year (around 5%) as they are now.

“It is difficult to pinpoint where and when further vulnerabilities may unfold, but we think areas that benefited the most from low rates and low inflation may be the most exposed," Shah said. 

Representatives speak with a jobseeker during a Construction Career Fair at Cape Fear Community College in Wilmington, North Carolina, on March 15. (Allison Joyce/Bloomberg/Getty Images)

The Fed released its economic projections Wednesday. Although not much changed from its previous outlook released in December, the Fed has grown somewhat more pessimistic about the economy while very slightly more optimistic about the labor market in 2023.

In its latest forecast, the Fed expects the US economy will grow by a measly 0.4% this year — lower than the also-puny 0.5% expected economic expansion in December.

However, the Fed now believes unemployment will rise to 4.5%, up from the current 3.6% rate. That's a slightly better forecast than the 4.6% unemployment rate the Fed had anticipated in December.

Assuming no change in the labor force, that would mean 1.5 million more people would be unemployed by the end of the year, according to the Fed's projections.

Inflation will continue to slide this year, the Fed thinks — just not as much as it had previously hoped. The central bank believes its favorite inflation metric, the Personal Consumption Expenditures index, will grow by 3.3% this year, more than the 3.1% it had predicted in its previous forecast.