A debate is emerging among top Federal Reserve officials about whether to plough forward with another interest rate increase amid diverging opinions over the magnitude of a potential credit crunch stemming from the recent banking turmoil.
Austan Goolsbee, president of the Chicago Fed, called for “prudence and patience” in setting monetary policy, in prepared remarks ahead of a speech at the Economic Club of Chicago, saying it was unclear how much regional banks might pull back on lending following the implosion of Silicon Valley Bank and Signature Bank last month.
“Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious,” said Goolsbee, who assumed his position in January and is a voting member on the policy-setting Federal Open Market Committee this year.
Goolsbee, who did not explicitly say whether he would support or dissent from another quarter-point rate rise next month, added that “we should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation”.
In a discussion that followed his speech, Goolsbee noted that the jobs market, while “unbelievably strong” was “cooling a bit”, suggesting that the Fed’s efforts to damp demand were starting to have an effect.
His remarks came on the heels of comments from John Williams, president of the New York Fed, who said that another quarter-point interest rate increase was a “reasonable starting point” in terms of the next policy meeting. The final decision, he said, would depend on incoming data, however.
That echoed a point made by Susan Collins, president of the Boston Fed, in a recent speech, where she said she currently “anticipate[d] some modest additional policy tightening, and then holding through the end of this year”.
Policymakers will need to decide at their meeting in early May on whether to ratify projections published last month, which indicate that most officials support one more quarter-point rate rise this year, with the federal funds rate expected to peak at 5 to 5.25 per cent. There are no cuts forecast until 2024.
According to Fed funds futures markets, traders are betting that the Fed delivers another rate rise this cycle before reversing course.
Speaking later on Tuesday, Patrick Harker, president of the Philadelphia Fed and another voting member of the FOMC, said the Fed will “continue to look closely at available data to determine what, if any, additional actions we may need to take”.
He said the “disinflation is proceeding slowly — which is disappointing, to say the least”.
Driving the debate is the severity of the economic impact of the recent banking turmoil. Jay Powell, the Fed chair, said last month that the string of bank failures could potentially be the equivalent of a “rate hike or perhaps more than that”, but cautioned that it was not easy to make that assessment in real time.
Williams on Tuesday told Yahoo Finance that the banking system had “really stabilised” and that while still early, there were not yet strong signs that credit conditions were dramatically tightening.
James Bullard, president of the St Louis Fed, also adopted a more optimistic tone about the economic outlook, saying last week that he was “less enamoured with the story that credit conditions will tighten appreciably enough to send the US economy into a recession”. He has also said that the most likely scenario was that the Fed would have to grapple with a strong economy and stubbornly high inflation.
Those remarks stand in sharp contrast to warnings from Goolsbee, who on Tuesday said “history has taught us that moments of financial stress, even if they don’t escalate into crises, can mean tighter credit conditions”.
“These can have a material impact on the real economy in a way that the Fed absolutely needs to take into account when setting policy,” he added, noting that it could well mean that monetary policy “has to do less” if the recent banking problems lead to financial tightening.
Source: Economy - ft.com
