Powell Suggests Moderation in Further Fed Rate Increases

Federal Reserve Chairman Jerome Powell seemed to signal a potential pause in future Fed rate increases late this week. On Friday, Powell delivered remarks at a Washington conference. In his comments, he pointed to evidence that the current interest rates appear to be having the desired impact.

After ten straight Fed rate increases, the current short-term rate is slightly more than 5%. According to Powell, the rate is believed to be high enough to slow growth and borrowing. The Fed Chair has repeatedly expressed the desire to slow the economy as a way to reduce inflationary pressures.

Lagging effects of Fed rate increases

Powell’s hint at a pause for reflection seems to be in line with other Fed officials. A number of those officials have called for a pause in further Fed rate increases in recent days. The commonly expressed view has been that the economy has not yet fully absorbed all of the existing rate hikes. Fed officials have suggested that a pause would help give them time to assess the impact of their recent actions.

Powell’s comments echo concerns from some officials that the Federal Reserve could spark a deeper recession if it is too aggressive with rate increases. As Powell noted, “We face uncertainty about the lagged effects of our tightening so far.” He also suggested that there is now a risk of making too many rate hikes.

Some other Fed officials have taken the opposite view. Noting that inflation remains well above the target 2% goal, those officials have suggested that additional Fed rate increases are likely to be necessary to fully tame rising prices.

Is the banking crisis helping the Fed’s effort?

Powell also said that it was possible that the recent banking crisis might contribute to the Fed’s effort to slow the economy. He noted that banks may be more likely to slow lending, which would negatively impact economic growth.

“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.”

The Associated Press cited two Fed officials who expressed skepticism about the potential impact on lending. Atlanta Fed president Raphael Bostic said that he wasn’t sure that there is a current financial market crisis. He also said that he had not seen lending slow as a result of recent bank failures. Meanwhile, Chicago Fed chief Austin Goolsbee claimed that the lending pullback he has seen is simply due to the recent Fed rate increases.

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