Chairman of the Federal Reserve Jerome Powell said Friday that strains in the banking sector could mean interest rates won’t have to be as high to control inflation.
Speaking during a monetary conference in washington, dcthe central bank chief noted that the Fed’s initiatives used to address the problems of mid-sized banks have mostly prevented the most pessimistic scenarios from occurring.
But he noted that the problems at Silicon Valley Bank and others could still affect the economy.
“Financial stability tools have helped ease conditions in the banking sector. Developments there, on the other hand, are contributing to tighter credit conditions and risk weighing on economic growth, hiring and inflation” , he said as part of a monetary policy panel.
“So, as a result, our policy rate may not need to rise as much as it otherwise would have to to meet our targets,” he added. “Of course, the magnitude of this is very uncertain.”
Powell spoke with markets mostly expecting the Fed at its June meeting to pause the series of rate hikes it began in March 2022. However, prices were volatile as Fed officials assess the impact this policy has had and will have on inflation which in the summer of last year hit a 41-year high.
Overall, Powell said inflation was still too high.
“A lot of people are experiencing high inflation right now, for the first time in their lives. It’s not a headline to say they really don’t like it,” he told a forum also attended by former Fed Chairman Ben Bernanke.
“We believe that failure to bring inflation down would not only prolong the pain, but also increase the social costs of returning to price stability, causing further harm to families and businesses, and we aim to avoid this while remaining firm in the pursuit of our objectives,” he added.
Powell called the Fed’s current policy “restrictive” and said future decisions would depend on data rather than being a set course. The Federal Open Market Committee has raised its benchmark borrowing rate to a target of 5% to 5.25% from near zero, where he had been sitting since the early days of the covid pandemic.
Officials pointed out that rate hikes operate with a lag of a year or more, so policy measures have not fully circulated through the economy.
“We have not made any decisions on the extent to which additional political funding will be appropriate. But given how far we have come, as I have noted, we can afford to look at the data and the changing outlook “Powell said.
Monetary policy has largely been geared towards cooling a simmering labor market in which the current unemployment rate of 3.4% is tied for the lowest level since 1953. Inflation on the Fed’s preferred measure sits at 4.6%, well above the long-term target of 2%.
Economists, including those at the Fed itself, have long predicted that rate hikes would drag the economy into at least a shallow recession, likely later this year. GDP grew at an annualized pace of 1.1% less than expected in the first quarter, but is on track to accelerate by 2.9% in the second quarter, according to an Atlanta Fed tracker.
Powell spoke the same day the New York Fed released research showing that the neutral long-term interest rate – which is neither restrictive nor stimulating – is essentially unchanged at very low levels, despite the pandemic era inflation spurt.
“It is important to note that 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.