The chair’s announcement comes the same week JPMorgan Chase announced their acquisition of First Republic Bank. Jamie Dimon, the CEO of JPMorgan Chase, said the sale "nearly" resolves the US banking crisis that began with the failure of Silicon Valley Bank.
Federal Reserve Chair Jerome Powell admitted on Wednesday that the American banking system remains “strong and resilient," but that the recent US financial hiccups could still pave the way for a recession.
Earlier Wednesday, the Federal Reserve hiked interest rates by 0.25% in another effort to fight inflation. The hike would put bank’s back on their toes, as the banking sector may continue to face one of its biggest challenges since the 2008 financial crisis.
“Our banking system is sound and resilient, with strong capital and liquidity,” the reserve chair said in his Wednesday remarks.
“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. In addition, we are committed to learning the lessons from this episode and to work to prevent episodes—events like this from happening again.”
“With the support of the Treasury, the Federal Reserve Board created the Bank Term Funding Program to ensure that banks that hold safe and liquid assets can, if needed, borrow reserves against those assets at par,” Powell added in his announcement.
“This program, along with our long-standing discount window, is effectively meeting the unusual funding needs that some banks have faced and makes clear that ample liquidity in the system is available.”
However, Powell further warned it is possible the US may experience a mild recession.
"You know, the case of avoiding a recession is in my view more likely than that of having a recession," Powell said during the press conference. "It's possible that we will have what I hope would be a mild recession."
The timing of Powell’s announcement is awkward, as the increase in interest rates has played a role in the banking crisis, which began earlier this year with the downfall of Silicon Valley Bank as it upended the value of their bonds.
After SVB’s failure its neighbor Signature Bank also collapsed. Soon after First Republic Bank also plummeted and was momentarily taken over by the Federal Deposit Insurance Corporation (FDIC) before being auctioned to JPMorgan Chase. Both the FDIC and JPMorgan will share losses on the acquisition.
In a rare, bipartisan effort, Sens. Elizabeth Warren (D-MA) and Rick Scott (R-FL) proposed legislation on Wednesday to establish an independent inspector general to oversee the Federal Reserve.
US Risks Loosing Up to 8 Million Jobs in Event of Protracted Default
A protracted default scenario in the United States could lead to the loss of almost eight million jobs, the White House's Council of Economic Advisers (CEA) said on Wednesday.
"A recent analysis by Moody’s, using a different model of the macroeconomy, arrived at a similar conclusion. They predict that under a clean debt ceiling increase, job growth continues over the next few quarters, adding 900,000 jobs," the CEA said on the website.
"But under a protracted default scenario, job losses amount to almost 8 million, an extremely stark difference of similar magnitudes to our own modeling."
The CEA noted that "without the ability to spend on counter-cyclical measures such as extended unemployment insurance, Federal and state governments would be hamstrung in responding to this turmoil and unable to buffer households from the impacts."
In this scenario, "neither would households be able to borrow through the private sector as the interest rates on the financial instruments that households and businesses use — Treasury bonds, mortgages, and credit card interest rates — would skyrocket due to risks of an uncertain future."
"While policy makers have thus far, in the long history of our Nation, avoided inflicting such damage on the American and even global economies, virtually every analysis we have seen finds that default leads to deep, immediate recessionary conditions," the statement read.
"Economists may not agree on much, but when it comes to the magnitude of risks invoked by closely approaching or breaching the debt ceiling, we share this deeply troubling consensus."
The US Treasury Department in January notified Congress it started using "extraordinary measures" to keep the federal government from defaulting on its debts. In December 2021, Congress increased the statutory debt limit to about $31.381 trillion.
The Biden administration wants Congress to raise the debt ceiling without attaching other economic policy proposals. However, House Speaker Kevin McCarthy (R-CA) has said that a "no-strings-attached" debt limit increase will not pass the lower chamber.
Last week, House Republicans passed the Limit, Save, Grow Act, which would raise the United States’ debt ceiling and reduce the deficit by cutting government spending. The bill would also recover unspent COVID-19 relief funds.
The US government will likely begin defaulting on its debt by June 1 if the congressional limit on the country’s debt servicing is not raised by then, Treasury Secretary Janet Yellen said in a letter to McCarthy.
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