A debate among top Federal Reserve officials over whether to raise another interest rate is unfolding amid differing views on the scale of a potential credit crunch stemming from the recent banking turmoil.
Austin Goolsbee, president of the Federal Reserve Bank of Chicago, called for “prudence and patience” in setting monetary policy in comments prepared ahead of a speech at the Economic Club of Chicago. Silicon Valley Bank and Signature Bank imploded last month.
“The more uncertainty there is about where these financial interventions are going, I think we need to be cautious,” said Goolsbee, who took office in January and is a voting member of the policy-setting Federal Open Market Committee this year.
Coolsbee, who did not publicly say whether he would support or rule out another quarter-point rate hike next month, should be cautious about raising rates too aggressively until he gathers more data and sees how well headwinds are working. We reduce inflation.”
In a discussion following his speech, Goolsbee noted that while the jobs market, while “incredibly strong,” is “cooling off a little bit,” the Fed’s efforts to dampen demand are beginning to have an impact.
His comments came after comments by New York Fed President John Williams that another quarter-point interest rate hike was a “reasonable starting point” based on the next policy meeting. However, the final decision will depend on incoming data, he said.
That echoed a comment Boston Fed President Susan Collins made in a recent speech, where she said she is currently “expected.”[d] Some modest additional policy tightening will then hold until the end of the year.
With the federal funds rate expected to rise to a range of 5 to 5.25 percent, policymakers will have to decide at their meeting whether to endorse projections released last month. . No cuts are projected until 2024.
Traders are betting the Fed will deliver another rate hike before reversing the cycle, according to Fed Fund futures markets.
It is the severity of the economic impact of the recent banking turmoil that drives the debate. Jay Powell, the Fed’s chairman, said last month that a string of bank failures could equate to “a rate hike or more,” but cautioned that making that assessment in real time is not easy.
Williams told Yahoo Finance on Tuesday that the banking system has “really stabilized” and that while it’s still early, there aren’t yet strong signs that credit conditions will tighten dramatically.
James Bullard, president of St. Louis Fed, took a more optimistic tone about the economic outlook, saying last week that he was “not enamored with the narrative that credit conditions will tighten enough to send the U.S. economy into recession.” He added that it is more likely that the central bank will have to contend with a strong economy and stubbornly high inflation.
Those comments are in stark contrast to the warnings of Goolsbee, who said on Tuesday that “history has taught us that moments of financial stress, even if they don’t escalate into crises, can mean tighter credit conditions.”
“These could have a material impact on the real economy in a way that the central bank absolutely needs to take into account when setting policy,” he added, adding that the latest bank means monetary policy “needs to do less”. Problems can lead to financial strain.
