This post was originally published on this site
Federal Reserve Gov. Christopher Waller indicated on Friday that the fallout from several bank failures in the spring may have played a role in the central bank’s decision this week to pause an increase in interest rates.
“Financial stresses in the banking sector are a factor that my colleagues and I are
closely watching as we determine the appropriate stance of monetary policy going
forward,” Waller said in a speech Friday in Norway.
If banks began to reduce loans to preserve their capital, he said, it could act like the equivalent of several interest rate increases.
“If that is the case, then it might reduce the need for at least some further tightening of monetary policy to lower inflation,” Waller said. “The Fed could tighten policy too much if it ignored such a development.”
The Fed on Wednesday left its policy interest rate unchanged for the first time in 11 meetings dating to 14 months ago. The central bank wants more time to gauge how much its prior rate hikes have slowed the economy and reduced inflation.
Yet the Fed also signaled the possibility of two more increases this year that would push short-term rates to as high as 5.75% unless inflation falls even faster. Just 14 months ago, the rate was near zero.
So far Waller said the Fed has not seen signs of increasing problems in the financial system.
“It is still not clear that recent strains in the banking sector materially intensified the tightening of lending conditions,” he said.
Waller emphatically rejected the idea the Fed caused the bank failures by raising interest rates so high. The Fed’s main job is to keep inflation low, he noted, not to make sure banks are stress free.
“It is the job of bank leaders to deal with interest rate risk, and nearly all bank leaders have done exactly that,” he said. “I do not support altering the stance of monetary policy over worries of ineffectual management at a few banks.”
Waller did not comment on the Fed decision in the text of his speech.
