You sure about that?

The Federal Reserve today raised the funds target by 25 basis points, bringing it to 5.25 percent. The decision was in line with market expectations, but the almost insouciant tone of the FOMC press release comes as something of a surprise, given the continuing instability in the banking system and the looming debt ceiling crisis. 

The problems in the banking sector are airily waved away in a single sentence, right at the start of the release: "The US banking system is sound and resilient".  This is followed by the statement that "Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation".  "Weighing on" those things was, of course, precisely the goal of the Fed's tightening all along, but it is unlikely that its vision of a soft landing included the messy collapse of several large banks.  Some acknowledgement that recent events in the financial system are at least in part the result of Fed actions might not have gone amiss, if only to reassure investors that the Fed knows it cannot afford to push things too far.  Fed Chair Powell will no doubt face extensive questioning on this topic from the media. 

As regards the current state of the economy, the Fed has very little to say: "Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated".

The rest of the press release is simply a restatement of the customary boilerplate: "The Committee remains highly attentive to inflation risks" and "is strongly committed to returning inflation to its 2 percent objective".  As usual, "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals".  The vote in favour of all this was unanimous: we will have to wait for publication of the minutes later this month to learn whether any Governors may have argued for keeping rate unchanged this time. 

The debt ceiling crisis, now less than a month from coming to a head, is not mentioned at all in the release, though it must surely have come up for discussion. The Fed must have a game plan in mind if the worst should happen, but it is unlikely to reveal any details ahead of time, in case it inadvertently makes matters worse. Would the Fed accept the much-discussed trillion dollar platinum coin, should the Treasury Department choose to mint one? That's something else we shall have to wait to find out.