Banking crisis is over but its effects will last, Powell says

Federal Reserve Chairman Jerome Powell indicated Wednesday that the period of bank failures that have rattled markets and the economy has come to an end.

Speaking to reporters after the Fed pushed ahead with its 10th rate hike since last March, Powell sought to reassure the public that the worst of the banking crisis is behind the U.S.

“There were three large banks, really from the very beginning, that were at the heart of the stress that we saw in early March — the severe period of stress. Those have now all been resolved, and all the depositors have been protected,” Powell said, referring to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank.

Powell also said the failure of First Republic, and its subsequent sale to JPMorgan Chase, “kind of draws a line under that period.”

Silicon Valley Bank (SVB), Signature Bank and First Republic Bank were all shut down by the Federal Deposit Insurance Corporation (FDIC). Their assets were sold off to other firms, and depositors were reimbursed for their losses well above the FDIC’s standard insurance limit of $250,000.

While Powell issued a tentative all-clear on the bank failures, the tighter credit conditions stemming from their collapse could have a lasting impact on the economy and, later this year, catalyze a recession that the Fed has been predicting since March.

“We have credit conditions tightening, not just in the normal way, but perhaps a little bit more due to what’s happening, and we have to factor all of that in,” Powell said.

Powell also said that after several weeks of money moving from smaller and regional banks toward bigger banks and money market funds, deposit flows through the financial system were normalizing.

But some market commentators see the three big-bank failures as just the beginning of turmoil in the U.S. financial sector.

“This is not ‘the end of the March banking crisis’ – it is still the beginning, as shuddering regional bank stocks already are showing at the stock exchanges’ opening bells,” Robert Hockett, a professor of law and finance at Cornell University, wrote in a Monday analysis.

Hours after Powell’s press conference wrapped, Bloomberg News reported PacWest Bank was “weighing a range of strategic options, including a sale” after its share price fell 45 percent.

Powell sees inflation falling. Will the economy the hold up?

Powell expressed confidence Wednesday that inflation will continue to decline as the Fed’s rate-hikes sap consumer demand and put pressure on the labor market.

“As goods pipelines have gotten back to normal so that we don’t have long waits and shortages and that kind of thing, I think you will see inflation come down, and you’ll see corporate margins coming down as a result of a return of full competition,” he said.

While there’s a lot of speculation that Wednesday’s rate hike could be the Fed’s final one before pausing, Powell wouldn’t be baited into giving a fixed timeline on ending rate increases, saying the bank would be prepared to do more, depending on further data.

Still, many economists now expect the Fed to pause rate hikes at its next meeting in June.

“The Committee left themselves room to change course, but for now it appears that the Committee’s preference is to leave rates at their present level until there is meaningful progress on the inflation front,” economist Curt Long of the National Association of Federally-Insured Credit Unions wrote in an analysis Wednesday.

While Powell said he hopes for a cooler labor market that doesn’t necessitate large-scale unemployment, he acknowledged the relative lack of precedent for reaching such an equilibrium.

“There’s no promises in this, but it just seems to me that it’s possible that we can continue to have a cooling in the labor market without having big increases in unemployment that have gone with many prior episodes. That would be against history — I fully appreciate that,” Powell said.