The Federal Reserve Chair Jerome Powell stated Friday that stresses in the banking sector could reduce inflationary pressures due to lower interest rates. At a monetary conference in Washington, D.C., the central bank leader noted that Fed initiatives to address problems at mid-sized banks have prevented worst-case scenarios from unfolding. Despite this, he noted that Silicon Valley Bank and other problems could still hurt the economy. “The financial stability tools helped to 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 as part of a panel on monetary policy. “So as a result, our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” he added. “Of course, the extent of that is highly uncertain.”
At its June meeting, Powell spoke with markets mostly anticipating a break from the Fed’s rate hikes beginning in March 2022. However, prices have fluctuated as Fed officials consider the impact of their policy on an inflation rate that was at a 41-year high in the summer of last year. On balance, 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 that they really don’t like it,” he said during a forum featuring former Fed Chairman Ben Bernanke. “We think that failure to get inflation down would, would not only prolong the pain but also increase ultimately the social costs of getting back to price stability, causing even greater harm to families and businesses, and we aim to avoid that by remaining steadfast in pursuit of our goals,” he added. Powell described current Fed policy as “restrictive” and said future decisions would depend on data rather than being predetermined. The Federal Open Market Committee has raised its benchmark borrowing rate to 5%-5.25% from near zero, where it had sat since the early days of the Covid pandemic.
