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Fed chair hints at pause on rate hikes when central bank meets next month


May 19, 2023

Chairman Jerome Powell indicated Friday that the Federal Reserve will likely forgo a hike in its benchmark interest rate when it meets in June for the first time since it began raising its key rate 14 months ago to combat high inflation.

By noting this, Powell provided some clarity on the Fed’s next likely policy move after a cacophony of speeches made this week by central bank officials had clouded the image.

«Having come this far, we have the luxury of looking at the data and the evolving outlook and making careful assessments,» Powell said, referring to the Fed’s 10 consecutive rate hikes, which have raised its key short-term rate from almost zero per year. it does to around 5.1%, its highest level in 16 years.

Speaking at a Fed conference in Washington, Powell said the central bank’s benchmark rate, which affects many consumer and business loans, is now high enough to constrain borrowing, spending and economic growth. Fed officials hope slower growth will cool inflation over time.

Several Fed officials, in speeches this week, signaled their support for suspending rate hikes based on the notion that rate hikes have not yet fully affected the economy and could take months to do so. Under that view, the Fed should take some time to assess the consequences of its actions and avoid tightening credit so much as to trigger a recession.

On Friday, Powell appeared to back that approach, saying: «We are faced with uncertainty about the lagged effects of our tightening thus far.»

The Fed chair also suggested that «the risks of doing too much versus doing too little are becoming more balanced.» That marks a change from earlier this year, when Powell used to say that the risk of raising rates too little to combat inflation outweighed the risk of raising them enough to cause a deep recession.

Powell further noted that turmoil in the banking sectorafter the collapse of three big banks in the last two months, it will likely cause banks to slow down lending, which could weaken the economy.

«As a result, our policy rate may not need to increase as much as it otherwise would to achieve our goals,» he said. «Of course, the extent of that is very uncertain.»

Comments from Fed officials this week had conveyed decidedly mixed messages about the next probable move of the central bank.

Most policymakers signaled their support for a pause at their next meeting. But several others expressed their belief that the Fed would have to raise rates further to curb persistent inflation. Lorie Logan, president of the Federal Reserve Bank of Dallas, said Thursday that inflation remains too high and the latest economic data does not yet warrant a pause in hikes.

Inflation, by the Fed’s preferred measure, has eased but remains well above the central bank’s 2% annual target. Inflation was 4.2% in March, compared to the previous year, although it is below the 7% of last June.

But excluding volatile food and energy costs, so-called core inflation has slowed much less, from a high of 5.4% in February 2022 to 4.6% in March. It has barely moved since November.

«The data continues to support the (Fed’s) view that bringing inflation down will take some time,» Powell said.

Not all Fed officials share Powell’s concern that bank turmoil will hurt the economy. Several Fed officials have suggested that the failure of Silicon Valley Bank and two others might have little impact.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, and Austan Goolsbee, head of the Chicago Federal Reserve, said this week that they haven’t seen lenders in their districts pull out of lending just because of bank failures.

“I don’t know if we have a crisis right now in the financial markets,” Bostic said. “We have a small number of institutions that had risk management strategies that are working less than you would like.”

Goolsbee, who spoke on a panel with Bostic, said banks in his region have tightened credit because of the Fed’s rate hikes and not necessarily because of bank failures.

But they have gone no further because of bank failures.