US Federal Reserve (Fed) Chairman Jerome Powell anticipated on Wednesday that, in the wake of the recent banking crisis, interest rate hikes may not be adequate to contain inflation.
“Instead, we now anticipate that some additional policy firming may be appropriate,” Powell said at a press conference after the Fed announced a 0.25-point interest rate hike to a range of 4.75% to 5%.
Asked about the difference between a rate hike in the future and a tightening of policy, Powell indicated that the focus should be on the word “power” as opposed to the rate hikes that the central bank has so far had “ongoing”.
Despite the banking crisis, he stressed that the Fed remains “committed” to bringing inflation down to the 2 % target.
In that sense, he explained that reducing inflation will require a period of “below-trend” growth and a moderation of labour market conditions: “Restoring price stability is essential to pave the way for maximum employment and stable prices in the long run,” he warned.
The Fed opted on Wednesday to raise rates by a quarter point, following the failure of two banks in recent weeks, Silicon Valley Bank (SVB) and Signature Bank, whose financial situation worsened because of the agency’s monetary policy, and the bailout of a third, First Republic Bank.
The panic also crossed the Atlantic and almost ended with the Swiss bank Credit Suisse, which finally had to be acquired over the weekend by its competitor UBS after the crisis of confidence that was sinking its share price in the market.
Powell told the media that they will continue to closely monitor conditions in the banking system and use “all necessary tools” to protect it.
“Our banking system is healthy, resilient, with strong capital and liquidity,” insisted the Fed chief, who considered that recent events could lead to tighter credit conditions for households and businesses.
He added that “it is too early to determine the extent of these effects and therefore too early to say how monetary policy should respond”.
The central bank president made it clear that they will closely monitor the available data and the actual effects of tighter credit conditions on economic activity, the labour market and inflation when making further decisions.
On the other hand, he said the Fed needs to “strengthen oversight and regulation” of the banking system.
“At a basic level, the management of Silicon Valley Bank failed miserably”, said Powell, noting that “supervisors saw the risks and intervened” and that their only interest is in identifying what went wrong.