Chairman Jerome Powell indicated on Friday that the Federal Reserve is likely to forgo a record rate hike when it meets in June for the first time since it began raising the key rate 14 months ago to combat soaring inflation.
Noting that, Powell offered some clarity about the Fed’s potential next policy move after a cacophony of rhetoric this week from central bank officials clouded the picture.
“Now that we’ve come this far, we can afford to look at evolving data and projections and make careful assessments,” Powell said, referring to the Fed’s 10 consecutive rate hikes, which have raised the key short-term interest rate from near zero annually. By about 5.1%, its highest level in 16 years.
Speaking at a Federal Reserve conference in Washington, Powell said the central bank’s benchmark interest rate, which affects many consumer and business loans, is now high enough to restrain borrowing, spending and economic growth. Fed officials hope that slower growth will moderate inflation over time.
Several Fed officials, in their speeches this week, have signaled support for a hold on rate hikes based on the notion that rate hikes have not yet fully affected the economy and could take months to do so. Under this view, the Fed should take time to assess the consequences of its actions and avoid tightening credit insofar as it triggers a recession.
On Friday, Powell appeared to endorse that approach, saying, “We are facing uncertainty about the late effects of our tightening so far.”
The Fed chair also suggested that “the risks of doing too much versus doing too little are more balanced.” This marks a shift from earlier this year, when Powell often said that the risks of raising interest rates too low to combat inflation outweigh the risks of raising them so high that they cause a deep recession.
Powell further noted that turmoil in the banking sector, following the collapse of three large banks in the past two months, is likely to prompt banks to reduce the pace of lending, which could weaken the economy.
“As a result, our policy rate may not need to go up as much as it would have to achieve our goals,” he said. Of course, the extent of that is highly uncertain.
Comments from Federal Reserve officials this week conveyed mixed messages about the central bank’s possible next move.
Most policy makers indicated their support for a pause at their next meeting. But many others believed that the Fed would have to raise interest rates to curb persistent inflation. Dallas Fed President Lori Logan said Thursday that inflation has remained very high and that recent economic data has not yet warranted a pause in increases.
Inflation, under the Fed’s preferred measure, fell, but remained well above the central bank’s annual target of 2%. The inflation rate was 4.2% in March compared to the previous year, although it was down from 7% last June.
But excluding volatile food and energy costs, so-called core inflation has slowed much less, from a peak of 5.4% in February 2022 to 4.6% in March. It has barely budged since November.
“The data continued to support the Fed’s view that it will take time to bring down inflation,” Powell said.
Not all Fed officials share Powell’s concern that banking turmoil will hurt the economy. Several Fed officials have indicated that the failure of the Silicon Valley bank and two others may have little impact.
Raphael Bostick, president of the Federal Reserve Bank of Atlanta, and Austan Goolsby, president of the Federal Reserve Bank of Chicago, said this week that they haven’t seen lenders in their areas cut back on lending just because banks fail.
“I don’t know that we have a crisis right now in the financial markets,” Bostick said. “We have a few organizations whose risk management strategies are working less well than they would like.”
Goolsby, who spoke in a session with Bostick, said banks in his area have tightened credit because of the Fed’s rate hikes and not necessarily because of bank failures.
But they did not go further because of the failure of the banks.
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