Federal Reserve Chairman Jerome Powell said on Friday that tensions in the banking sector could mean interest rates don’t need to be as high to bring inflation under control.
Speaking at a monetary conference in Washington, DC, the Fed governor noted that the Fed’s initiatives to address problems at mid-sized banks had largely prevented worst-case scenarios from occurring.
However, he cautioned that problems at Silicon Valley Bank and others could still have an impact on the economy.
“The financial stability tools have helped calm conditions in the banking sector. Developments there, on the other hand, are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” he said at a monetary policy panel.
“As a result, our policy rate may not need to rise as much as it otherwise would to meet our targets,” he added. “Of course, the extent is highly uncertain.”
Powell spoke to markets, largely expecting the Fed to take a break from the series of rate hikes that began in March 2022 at its June meeting. However, pricing has been volatile as Fed officials weigh the impact the policy has had and will have on inflation, which hit a 41-year high last summer.
All in all, Powell said inflation is still too high.
“Many people are currently experiencing high inflation for the first time in their lives. It’s not a headline to say they really don’t like it,” he said during a forum also attended by former Fed Chairman Ben Bernanke.
“We believe that a failure to bring inflation down would not only prolong the pain but would ultimately increase the social cost of returning to price stability, causing even greater harm to families and businesses, and we want to avoid this by stand firm.” Pursuing our goals,” he added.
Powell described the Fed’s current policy as “restrictive” and said future decisions are data dependent and not a predetermined course. The US Federal Open Market Committee has raised its policy rate to a target of 5% to 5.25%, from near zero where it has been since the early days of the Covid pandemic.
Officials have stressed that rate hikes are delayed by a year or more, so policy action has yet to fully sink into the economy.
“We have not made any decisions as to what extent additional political resources will be appropriate. But given how far we’ve come, as I mentioned, we can afford to take a look at the data and the evolving outlook,” Powell said.
Monetary policy is largely focused on cooling a hot labor market, where the current unemployment rate of 3.4% is the lowest since 1953. The Fed’s preferred inflation rate is 4.6%, well above the long-term 2%. reach target.
Economists, including those from the Fed itself, have long predicted that rate hikes would push the economy into at least a mild recession, likely later this year. GDP grew less-than-expected at an annual rate of 1.1% in the first quarter, according to an Atlanta Fed tracker, but is expected to accelerate by 2.9% in the second quarter.
Powell was speaking on the same day that the New York Fed released research showing that the long-term neutral interest rate – which is neither restrictive nor stimulus – is essentially unchanged at very low levels despite the surge in inflation during the pandemic.
“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.