What’s next for the U.S. economy? ‘The extent of these effects is uncertain.’

The recent turmoil in the banking system has created a murky outlook for the U.S. economy. According to the Federal Open Market Committee (FOMC) in its monetary policy statement on Wednesday, recent developments will likely result in tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation. However, the extent of these effects is uncertain.

In other words, the odds of getting turned down for a loan may have increased by an uncertain amount as banks assess the uncertain outlook for their deposits and regulation. While the woes in the banking sector may not have been intended, their effect on financial conditions is generally in line with what the central bank has been aiming for in its ongoing effort to bring down inflation.

The Federal Reserve’s H.8 report published on Friday showed that bank deposits fell by $98.4 billion to $17.5 trillion in the week ending March 15, the most significant one-week decline since April 2022. The decrease was entirely due to a record plunge in deposits at smaller institutions. Deposits at small banks slumped $120 billion, while those for the 25 largest firms rose almost $67 billion. In addition, so-called “other” warranties, which exclude accounts with maturity dates such as certificates of deposit, declined by $78.2 billion to $15.7 trillion.

Such a tightening in financial conditions would work in the same direction as rate tightening. Fed Chair Jerome Powell explained during the post-FOMC meeting press conference, “In principle, you can think of it as the equivalent of a rate hike or perhaps more than that. But, of course, it’s impossible to make that assessment today with any precision whatsoever.”

Related Facts

• The S&P 500 climbed 1.4% last week, now up 3.4% year to date, up 11% from its October 12 closing low of 3,577.03, and down 17.2% from its January 3, 2022, closing high of 4,796.56.
• While policymakers sound pretty serious about the safety of everyone’s deposits, who knows what people will do upon hearing about turmoil in the banking system?
• All eyes on the Fed’s H.8 report: the decline in deposits could signify future financial instability.

Key Takeaway

The future of the U.S. economy is uncertain due to the current turmoil in the banking system. The recent decline in bank deposits could lead to tightening lending standards, affecting economic activity, hiring, and inflation. While the policymaker’s priority is to reassure the safety of all warranties, the extent of the effects of the current situation is still unknown, and much depends on how people act upon hearing about financial instability.

Conclusion

As we move forward, we should keep an eye on the H.8 report, which could be a leading indicator of future financial instability. The effects of the recent turmoil in the banking system are uncertain; policymakers need to be vigilant and ready to act accordingly to avoid any potential disruptions to the U.S. economy.