Fed officials describe the March rate hike as “appropriate” with rising inflation and banks’ resilience

Two Federal Reserve officials said Thursday that the Fed’s decision last week to raise interest rates by another 0.25% was necessary because inflation remains so high.

Boston Fed President Susan Collins said another 0.25% rate hike was “appropriate” amid rising inflation and uncertainty about the lingering effects of the banking crisis.

“Recognizing the growing uncertainty, I think staying on track with a quarter-percent increase in the policy rate at last week’s FOMC meeting was appropriate,” Collins said in a speech in Washington at the NABE Economic Policy Conference.

Collins also said it expects to raise interest rates by another 25 basis points from the current range of 4.75%-5% to a new range of 5%-5.25% – in line with the average forecast from Fed officials – and to hold them until the end of the period. year.

Richmond Fed Chairman Tom Barkin said in a separate speech Thursday that he wanted to raise interest rates by 0.25%, given that the banking system seemed “resilient” at the time, while also noting that inflation is very high.

“I saw significant inflationary pressures and a resilient banking system,” Barkin said in a speech in Richmond.

Parkin also suggested that he wanted to avoid a situation like the 1970s experience.

“If you hold back on inflation too soon, inflation comes back stronger, requiring the Fed to do more, with more damage,” Barkin said. “With inflation soaring, broad-based and going on, I didn’t want to take any chances.”

Neither Parkin nor Collins are currently voting members of the Federal Open Market Committee, which is the Federal Reserve committee that votes on policy changes.

Recent bank failures could lead banks to lend less, offsetting the need for more interest rate hikes, Collins said, echoing a view put forward by Federal Reserve Chairman Jerome Powell at a news conference last week.

“Recent financial sector stresses have added to this challenge by increasing uncertainty about appropriate monetary policy,” Collins said. “While the banking system remains strong and resilient, recent developments are likely to lead banks to take a somewhat more conservative view and tighten lending standards, contributing to slowing the economy and reducing inflationary pressures. These developments may partly offset the need for additional rate increases Benefit. . “

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Collins also echoed comments by Powell and other officials that emphasized that the banking system remains “strong and resilient, with well-capitalized institutions and ample liquidity.”

“The Federal Reserve continues to monitor financial conditions closely, and is prepared to use all tools at its disposal in keeping the banking system safe and sound,” Collins said.

Barkin noted that it is still too early to tell whether banks will tighten credit and slow consumer spending and business investment.

He said the Fed would need to be “smart,” noting that if inflation persists, the central bank could raise interest rates further.

“Most of the projections for our policy path look medium to the risk of higher inflation with the risk of contagion in the banks,” he said. “I still see the range of possible outcomes as very wide. If inflation persists, we can respond by raising interest rates further… And if I’m wrong about the pricing dynamics that are in place, or about credit conditions, we can respond appropriately.”

Collins said the latest data underscores the Fed’s need to do more to bring inflation down to the 2% target. Recent data showed signs of more underlying strength in the economy than expected, Collins said, with strong job growth and stronger-than-expected spending in February.

The latest consumer price index showed consumer prices rose 6% from a year earlier in February, the slowest year-over-year increase since late 2021.

“This strength may reflect the fact that politics did not enter fully restricted territory until the second half of 2022, and it may be too early to see its full effects on real activity,” Collins said.

“While we may see some initial indications of moderation in wages, more will be needed for a sustained improvement in price inflation,” she said.

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