(Bloomberg) -- Federal Reserve Bank of Minneapolis President Neel Kashkari said it was premature to judge what impact the collapse of Silicon Valley Bank will have on the economy, but the Fed also needs to focus on lowering inflation.
“What’s unclear right now is how much of the banking stresses of the past few weeks is leading to a sustained credit crunch which would then slow down the US economy,” he told a townhall Thursday in St. Paul, Minnesota. “Banks on average have a lot of capital. The Federal Reserve and the other banking regulators are standing behind the banking system. So that should give us all confidence. It’s going to take us a while until we fully understand, are there more losses out there.”
Kashkari was at the center of the government’s response to the 2008-2009 financial crisis and he said that he’d taken some important lessons from that experience.
“Banking panics and banking stresses tend to take longer than you think. In 2008, it took a couple years. I’m not forecasting that. I don’t think we have that kind of situation here,” he said. “But every time in 2008, we thought we are through it there was another shoe yet to drop. So I am prepared to think this could take a little longer than we expect until we fully get behind it.”
Still, he also noted that inflation was too high and that the services sector, excluding housing, has yet to slow down despite a series of aggressive interest-rate increases by the Fed over the past 12 months.
“The services part of the economy has not yet slowed down and wage growth is — we want higher wages — but wage growth is still growing faster than what is consistent with our 2% inflation target,” he said. “That tells me we still have more work to do to bring the services side of the economy back into balance.”
US central bankers are trying to balance their responsibility for price stability at a time of high inflation, and financial stability following the second-biggest bank failure in US history.
Officials raised interest rates by a quarter percentage point last week, continuing their year-long fight to cool price pressures despite recent turmoil in the banking system.
The move lifted their policy benchmark to a 4.75% to 5% target range, from near zero in March 2022. Forecasts released at the same time show the 18 officials expect rates to reach 5.1% by the end of the year, according to their median projection, implying one more 25 basis-point hike.
(Updates with Kashkari comment on inflation in sixth paragraph.)
©2023 Bloomberg L.P.
Advertisement