Fed Chairman Powell says interest rates may not have to rise as much as expected to rein in inflation

Federal Reserve Chairman Jerome Powell said on Friday that pressures in the banking sector may mean that interest rates will not be raised to control inflation.

Speaking at a monetary conference in Washington, D.C., the central bank chief noted that the Fed’s initiatives used to deal with problems in mid-sized banks have mostly stopped worst-case scenarios from unfolding.

But he noted that problems at the Silicon Valley bank and others could reverberate through the economy.

He said as part of a committee on monetary policy.

“As a result, our policy rate may not need to go up as much as it would have to achieve our goals,” he added. Of course, the extent of that is highly uncertain.

Powell spoke to markets mostly expecting the Fed at its June meeting to take a break from the series of interest rate hikes it began in March 2022. However, rates have been volatile as Fed officials weigh the impact this policy will have on inflation that last summer reached its highest level in 41 years.

Overall, Powell said, inflation is still very high.

“Many people are currently experiencing high inflation rates, for the first time in their lives. It’s not headline-grabbing to say they don’t really like it,” he said during a forum that also featured former Federal Reserve Chairman Ben Bernanke.

“We believe that failure to reduce inflation will not only prolong the pain, but will also ultimately increase the social costs of returning to price stability, causing even greater harm to families and businesses, and we aim to avoid this by remaining steadfast in pursuing our goals.” .

Powell called the Fed’s current policy “restrictive” and said future decisions will be based on data rather than a predetermined path. The FOMC raised the benchmark borrowing rate to a target of 5%-5.25% from near zero where it has sat since the early days of the Covid pandemic.

Officials stressed that interest rate increases last for a year or longer, so the policy moves have not been fully spread across the economy.

“We haven’t made any decisions about the extent to which additional policy funding will be appropriate. But given how far we’ve gone, as you indicated, we can afford to look at the evolving data and projections,” Powell said.

Monetary policy has been directed in large part toward cooling a hot labor market as the current unemployment rate of 3.4% is tied for the lowest level since 1953. Inflation, according to the Fed’s preferred measure, is 4.6%, well above 2%. target range.

Economists, including those at the Fed itself, have long predicted that raising interest rates would push the economy into at least a shallow recession, likely later this year. Gross domestic product grew at a less than expected 1.1% rate in the first quarter but is on track to accelerate to a 2.9% rate in the second quarter, according to Atlanta Federal Tracker.

Powell spoke on the same day the New York Federal Reserve released research showing that the long-term neutral interest rate — one that is neither restrictive nor stimulus — was essentially unchanged at very low levels, despite soaring pandemic-era inflation.

“Importantly, there is no evidence that the era of ultra-low natural interest rates is over,” New York Fed President John Williams said in prepared remarks.