Chairman of the Federal Reserve Jerome Powell said Friday that the stresses in the banking sector may mean that interest rates do not need to be as high to control inflation.
Speaking to a monetary conference in Washington, DCthe leader of the central bank noted that the Fed’s initiatives used to deal with the problems of middle-sized banks generally stopped the worst situations from transpiring.
But he noticed that the Silicon Valley Bank problems and some may even resonate through the economy.
“Financial stability tools have helped to calm conditions in the banking sector. The developments there, on the other hand, have contributed to tighter credit conditions and are likely to weigh on the growth of economy, hiring and inflation,” he said as part of a monetary policy panel.
“So as a result, our policy rate may not need to increase as much as it otherwise would to meet our goals,” he added. “Of course, the extent of that is uncertain.”
Powell spoke to markets that generally expect the Fed at its June meeting to take a break from a series of rate hikes it began in March 2022. However, pricing has been volatile as Fed officials weighing the impact of the policy that has and has on inflation that in the summer of last year was running at a 41-year high.
On balance, Powell said inflation is still too high.
“A lot of people today are experiencing high inflation, for the first time in their lives. It’s not a headline to say they don’t really like it,” he said during a forum that also featured former Fed Chairman Ben Bernanke.
“We think that the failure to reduce inflation, not only prolongs the pain but also increases the end of the social costs of the return to price stability, causing more damage to families and businesses, and we aim to avoid that by remaining steadfast in the pursuit of our goals,” he added.
Powell described the Fed’s current policy as “restrictive” and said future decisions will depend on data as opposed to a preset course. The Federal Open Market Committee has raised its benchmark borrowing rate to a target of 5%-5.25% from near zero where it has sat since the early days of the covid pandemic.
Officials stress that rate hikes are operating with a lag of a year or more, so the policy measures have not yet fully cycled through the economy.
“We haven’t made any decisions about the extent to which additional policy funding would be appropriate. But how far we’ve come, as I noted, we can look at the data and the evolving perspective,” Powell said.
Monetary policy is in large part aimed at cooling a hot labor market in which the current 3.4% unemployment rate tied for the lowest level since 1953. Inflation on the Fed’s preferred measure is running at 4.6%, above the 2% upper target.
Economists, including those at the Fed itself, have long predicted that a rate hike would drag the economy into at least a shallow recession, likely later this year. GDP grew at a less-than-expected 1.1% annual pace in the first quarter but is on track to accelerate to 2.9% in the second quarter, according to an Atlanta Fed tracker.
Powell said the same day the New York Fed released research showing that the high neutral interest rate — one that is neither tight nor stimulative — has essentially remained at a very low level, despite the pandemic. inflation surge.
“Importantly, there is no evidence that the era of very low natural interest rates is over,” New York Fed President John Williams said in prepared remarks.