Fed official: “We need to be careful” about raising rates after bank failures

Mr. Goolsbee became president of the Chicago Fed in January and voted for quarter-point increases in the benchmark federal funds rate at both central bank meetings this year, most recently in March to a range of 4.75% to 5%. But his speech on Tuesday did not include explicit support for further increases.

Over the past year, the Fed has raised interest rates at the fastest pace since the early 1980s to tackle inflation, which jumped to a 40-year high last year. The Fed raises interest rates to fight inflation by slowing the economy through tightening financial conditions, such as higher borrowing costs, lower stock prices, and a stronger dollar, which curb demand.

Regulators stepped in aggressively to boost confidence in the banking system after a Silicon Valley bank run forced them to close the bank on March 10 and the second bank, Signature Bank, to close on March 12.

Mr Goolsbee said surveys of bank lending showed lenders were already tightening loan standards before the two banks failed last month. He said he would pay close attention to polls and other anecdotal data about borrowing conditions in determining how to set policy in the coming weeks.

“Given how widespread uncertainty is about where these financial headwinds are going, I think we need to be careful,” he said. “We should collect more data and be careful about raising interest rates too aggressively until we see how much of a job the headwinds are doing for us in bringing down inflation.”

Mr Goolsbee said he saw no tension between the Fed’s efforts to slow the economy to combat inflation and its efforts to maintain a strong and stable banking system. But he said financial stress, even without escalating into a full-blown crisis, could slow the economy by reducing the availability of loans and other credit to households and businesses.

“I don’t think … we should stop prioritizing fighting inflation,” he said, due to pressures in the financial system. “But we also have to recognize that this mix could hit some sectors or regions in a way that feels different than if monetary policy were to act on its own.”

Separately, New York Federal Reserve Bank President John Williams said officials are watching credit and banking conditions closely, but said there are no indications yet that business or consumer spending has been severely affected by the change in lending standards.

Another key consideration is whether Fed officials “really see signs of this underlying inflation coming down,” Mr. Williams told Yahoo Finance.

Federal Reserve officials hold their next meeting in early May. Mr. Williams, a senior ally of Fed Chairman Jerome Powell, pointed to the average forecasts of 18 officials on interest rates presented at their meeting last month. Those showed, he said, that policymakers “may be expecting one more price increase.”

Mr Williams said last week’s report on employment in March showed demand for work remained strong, and inflation “remains very high”. He said a measure of service prices that excludes energy and housing costs, which officials believe captures underlying price pressures, “hasn’t budged yet.”

Write to Nick Timiraos at [email protected]