May 19, 2023
Powell says tighter credit could mean a lower peak in rates
The probability of a rate hike in June went way down during Powell's speech: Chief global strategist
U.S. Federal Reserve Chair Jerome Powell gave a clear signal he is inclined to pause interest-rate increases next month, taking command of the policy debate after several officials suggested they wanted to keep hiking.
“We’ve come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” Powell told a Fed conference Friday in Washington.
“Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments,” he said, reading from prepared notes.
Investors pared bets on a rate hike next month to around 13 per cent after Powell’s comments compared with 33 per cent before he spoke.
Powell’s remarks reinforce similar guidance this week from other members of his leadership team, including New York Fed President John Williams and Governor Philip Jefferson, recently nominated as vice chair pending Senate confirmation.
“His comments indicate his baseline view is to pause in June to assess incoming data,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co. But she cautioned that if economic data before the next meeting, including a fresh reading on consumer prices, come in above expectations, the Fed chair could still lead a hike because “the guidance he is offering is limited.”
Officials raised rates by a quarter percentage point earlier this month to a target range of 5 per cent to 5.25 per cent and signalled they could hold rates steady when they next meet June 13-14.
The U.S. central bank has increased interest rates 5 percentage points in little more than a year, undertaking its most aggressive tightening campaign in decades to quell high inflation.
Some officials, including Governor Michelle Bowman and Cleveland Fed President Loretta Mester, have suggested the Fed should keep raising rates because they’ve not seen convincing evidence that price pressures are cooling fast enough.
But Powell signalled that he isn’t in that camp, citing headwinds to the economy stemming from the recent collapse of four regional US banks.
“While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” Powell said. “As a result our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain.”
Policymakers in March projected rates peaking at 5.1 per cent according to their median outlook — the level reached earlier this month — though seven other officials forecast they would need to go higher.
With the labour market and economic growth more resilient than many expected and inflation still high, officials could revise up their outlook for rate projections they submit in June.
The conference, held at the Fed’s headquarters in Washington, honors the memory of former Fed economist Thomas Laubach, who died in 2020 at the age of 55.