US central bankers face a tricky balancing act as they prepare to deliver another interest rate hike next month, weighing evidence that inflation remains too high against a post-war lending pullback. recent banking turmoil.
Ahead of the lull ahead of its next policy meeting in early May, Federal Reserve officials tacitly backed another rate hike, in a move that would lift the fed funds rate above 5 percent for the first time. time since mid 2007.
Beyond that point, however, policymakers have not made any commitments about how much more they will need to do to control inflation. This reflects a desire to keep all options on the table, but also uncertainty about how much a credit crunch will slow a still-strong economy.
John Williams, president of the New York Federal Reserve Bank and a close ally of Chairman Jay Powell, articulated this dilemma just days before the so-called communications “blackout.”
“There are a lot of factors that tell me the economy is improving and could even surprise more on the upside, but obviously there are concerns about risks around tightening credit conditions,” he told reporters on Wednesday. “It’s just a matter of getting the right view on the balance of that and the right monetary policy.”
He added: “Uncertainty can go both ways.”
The economy continues to show signs of good health. Most Fed officials characterize the labor market as “tight,” even as monthly job growth has slowed. diminished. Wage growth, though slower, remains well above a level consistent with trending inflation back to the Federal Reserve’s 2 percent target. Although the annual pace of inflation has slowed significantly, monthly measures of underlying price pressures remain. worryingly high.
Speaking on the last day before the quiet period, Fed Governor Lisa Cook emphasized the Fed’s focus on incoming data to guide its future policy decisions.
“If tighter financial conditions are a significant drag on the economy, the appropriate trajectory for the federal funds rate may be lower than it would be in their absence,” he said, adding that “if the data shows continued strength in the economy and slower disinflation.” , we may have more work to do.”
Justifying his stance in favor of at least one more rate hike, Christopher Waller, an influential Fed governor, was to the point of saying that recent data indicates that “we have not made much progress on our inflation target.”
opinions have diverged, however, about how significantly regional banks have pulled out of lending in the wake of the Silicon Valley Bank failure last month and to what extent the availability of credit in the economy is now crippled. Powell and other officials acknowledge that the credit crunch will act as a proxy for additional rate hikes from the Fed itself. But with the full impact not yet known, “at the moment it’s about risk management,” Matthew said. Luzzetti, chief US economist at Deutsche Bank.
According to the Fed’s latest Beige Book, which compiles anecdotal evidence from businesses across the country, there has already been a widespread tightening of credit standards and a sharp drop in consumer and business loan volumes in several districts. The question now is how much worse it could get, fueling fears that the central bank is on the brink of taking its tightening campaign too far.
“Even in the best of times, monetary policy is an error-prone enterprise,” said David Wilcox, who led the Fed’s research and statistics division and is now affiliated with the Peterson Institute for International Economics and Bloomberg Economics. “That bank crunch probably makes the calculation a little more complicated at this point.”
Since the SVB debacle, central bank employees have altered his call about a recession, concluding that a “mild” one was now his base case this year, according to the March meeting minutes. Officials continue to downplay the likelihood of an economic contraction, but several have taken a more circumspect approach on the path of policy.
“At this point, I don’t see why we would keep going up, up, up and then go, ‘oops'” and quickly cut rates, Patrick Harker, Philadelphia Fed president and voting member of the Federal House. Open Market Committee said recently. Austan Goolsbee, the new Chicago Fed president and FOMC voting member, also called for “prudence and patience” after what has been the most aggressive campaign to tighten monetary policy in decades.
Tim Duy, chief US economist at SGH Macro Advisors, said: “As interest rates rise, you get that conflict between people who are still really data-focused and people who are being more cautious because of the policy potential. lags, which have been exacerbated by the banking situation”.
Duy expects the Fed to signal at its policy meeting that it may well raise rates again in June to achieve as much flexibility as possible. That could be done by keeping the language in the latest policy statement, which accommodated a more evasive stance that “some additional policy reaffirmation may be appropriate.”
In March, most officials forecast that federal funds would peak at between 5% and 5.25% and that level would remain until 2024.
Duy said: “It is very difficult for an inflation targeting central bank to walk away from rate hikes when core inflation has not shown persistent progress towards its target.”