Fed Chairman Suggests Interest Rates May Not Need to Rise as Much to Achieve Goals
Federal Reserve Chair Jerome Powell addressed concerns about the banking sector and its impact on interest rates during a monetary conference in Washington, D.C. He acknowledged that the Federal Reserve’s efforts to address issues in mid-sized banks had helped prevent worst-case scenarios from occurring. However, he highlighted the potential reverberations of problems at Silicon Valley Bank and other institutions throughout the economy.
Powell noted that the financial stability tools employed by the central bank had calmed conditions in the banking sector but had contributed to tighter credit conditions, which could hinder economic growth, hiring, and inflation. Consequently, he suggested that interest rates might not need to rise as much as previously anticipated to achieve the Fed’s goals, although the extent of this adjustment remained uncertain.
The market had expected the Federal Reserve to pause its series of rate hikes during its upcoming June meeting, initiated in March 2022. Powell confirmed that inflation remained too high and emphasized the negative impact of sustained high inflation on households and businesses. He reiterated the Fed’s commitment to price stability and avoiding prolonged economic pain and social costs.
Characterizing the current Fed policy as “restrictive,” Powell stated that future decisions would be dependent on data rather than following a preset course. The Federal Open Market Committee had increased the benchmark borrowing rate to a target range of 5%-5.25% from near zero at the onset of the Covid pandemic. However, officials highlighted that rate hikes take time to circulate fully through the economy, with a lag of a year or more.
Powell emphasized that no decisions had been made regarding the appropriateness of further policy adjustments. He expressed the need to evaluate data and the evolving economic outlook given the progress made so far. The primary focus of monetary policy has been cooling down the hot labor market, with the current unemployment rate at 3.4%, tying with the lowest level since 1953. Meanwhile, inflation, measured by the Fed’s preferred gauge, stands at 4.6%, well above the long-range goal of 2%.
Economists, including those at the Fed, have long predicted that rate hikes could potentially push the economy into a shallow recession, possibly later this year. The first-quarter GDP growth was below expectations at an annualized pace of 1.1%. However, the Atlanta Fed’s tracker suggests an anticipated acceleration of 2.9% in the second quarter.
On the same day, the New York Fed released research indicating that the long-range neutral interest rate, which neither stimulates nor restricts the economy, remains at very low levels despite the inflation surge experienced during the pandemic.
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