Fed official: ‘We should be cautious’ about raising rates after bank failures

Potential fault lines emerged on Tuesday over whether the Federal Reserve should raise interest rates next month as it probed the fallout from banking sector pressures triggered by the collapse of two mid-sized banks last month.

Chicago Fed President Austin Goolsbee said the central bank should proceed cautiously with any additional rate hikes as it assesses the aftereffects of bank failures during a speech on Tuesday. “In moments of fiscal stress like these, a sound monetary approach calls for prudence and patience,” he said in a speech at the Economic Club of Chicago.

Mr. Goolsbee became president of the Chicago Fed in January and has voted in favor of quarter-point increases in the benchmark federal-funds rate at the central bank’s two meetings this year, most recently from 4.75% to 5% in March. But his speech on Tuesday lacked overt support for further increases.

Over the past year, the central bank has raised rates at its fastest pace since the early 1980s to combat the highest inflation in 40 years. The central bank raises rates to fight inflation by slowing the economy through tight financial conditions such as high borrowing costs, low stock prices and a strong dollar, which curbs demand.

After a run at Silicon Valley Bank forced the bank to close on March 10 and a second creditor, Signature Bank, on March 12, regulators intervened aggressively to boost confidence in the banking system.

Mr. Bank-lending surveys show that lenders had already tightened credit standards before the two bank failures last month. Coolsbee said. He said he would pay considerable attention to surveys of borrowing conditions and other anecdotal data in deciding how to set policy in the coming weeks.

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“The more uncertainty there is about where these financial interventions are going, I think we need to be cautious,” he said. “Until we gather more data and see how much headwinds are working for us in reducing inflation, we should be cautious about raising rates too aggressively.”

Mr. Coolsbee said. But financial pressures, even without a full-blown crisis, can slow the economy by reducing the availability of loans and other credit to households and businesses, he said.

“I don’t believe we should stop prioritizing the fight against inflation, because of the pressures in the financial system,” he said. “But we also need to recognize that this combination may affect some sectors or regions in a way that looks different than monetary policy acting on its own.”

Separately, New York Fed President John Williams said officials were watching credit and banking conditions more closely, but he said there were no signs yet that business or consumer spending would be strongly affected by changing credit standards.

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

Fed officials will hold their next meeting in early May. A top ally of Fed Chairman Jerome Powell, Mr. Williams pointed to the average of 18 officials’ forecasts of interest rates presented at their meeting last month. He said policymakers “may expect one more rate hike.”

Last week’s report on March hiring showed that labor demand remained strong, and inflation was “still very high,” Mr. Williams said. Officials believe that a measure of prices of services, excluding energy and housing costs, will capture underlying price pressures, which are “still unmoved,” he said.

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Write to Nick Timiraos at [email protected]

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