The expected credit crunch following recent bank failures could limit how far the U.S. central bank can raise its benchmark interest rate, the Fed chair said, as officials weigh the need to forego further tightening.
Jay Powell on Friday highlighted the potential fallout from Silicon Valley Bank and other bank failures, stressing the high degree of uncertainty surrounding the economic outlook.
“While financial stabilization tools are helping to stabilize conditions in the banking sector, on the other hand, developments in the banking sector are tightening credit conditions and could weigh on growth, employment and inflation,” he said in a speech organized by the central bank. said at the meeting. The Fed is in Washington. “As a result, our policy rate may not need to rise as much to achieve our goals.”
He added that the extent of the impact on credit conditions was “highly uncertain”.
Powell’s comments come as Fed policymakers debate whether to press ahead with an 11th straight rate hike at next month’s meeting or pause monetary policy tightening to combat persistent inflation.
The Fed has raised its benchmark policy rate by more than 5 percentage points since March 2022, to a target range of 5-5.25%, an increase that Powell said on Friday was notable.
“We’ve come a long way in tightening policy . . . so far there’s uncertainty about the lagged effects of our tightening and the extent of the credit squeeze that these banking stresses will cause,” he said.
Powell added separately that the Fed could “afford to look at the data” before deciding to raise rates further.
That echoed messages sent during the Fed’s last meeting, which economists interpreted as support for an imminent pause in rate hikes. Powell said on Friday that no decision had been made on the June meeting. As chairman, he has been tasked with unifying a seemingly divided group of officials, with several policymakers recently expressing doubts that the Fed would raise policy rates enough to rein in inflation.
Dallas Fed President Lori Logan, a voting member of the Federal Open Market Committee, said on Thursday there was no convincing evidence for a pause in rate hikes yet.
St. Louis Fed President James Bullard said in an interview with the Financial Times on Thursday that slow progress on inflation “may require some insurance by raising interest rates to make sure that we really do have inflation under control”.
Also on Friday, New York Fed President John Williams warned that despite the pandemic and the recent surge in inflation, central banks will likely have to deal with low interest rates once the shock passes.
“There is no evidence that the era of very low natural interest rates is over,” he said, referring to the level of interest rates that neither stimulate nor dampen growth.