It is not the first time he has said it and he has not said it in a very forceful way either, but the president of the Federal Reserve, Jerome Powell, has insisted that the banking crisis may make fewer rate hikes necessary. In a conference in which he participated with his predecessor Ben Bernanke, Powell has provided little news about the messages that he has been conveying in his latest public interventions and has avoided referring to a possible debt crisis. As Powell weighed in, Republicans and Democrats broke off negotiations to raise the debt ceiling. Rates and debt ceiling are the two factors that move the financial markets at this time.
The contrast between Bernanke and Powell was stark. The Nobel laureate was relaxed, improvising his responses to the moderator’s questions and joking. Powell, however, was serious and somewhat tense, he had a paper in front of him with the answers prepared for the previously agreed questions and he did not go out of the script in an act that was held in memory of the Federal Reserve economist Thomas Laubach, who died in 2020 at age 55.
One of the questions that Powell was asked was about the separation principle, that is, about the different tools to combat inflation and to achieve financial stability, which Powell has relativized. “We have separate tools, monetary policy to achieve our economic objectives, and liquidity, supervision and regulation to address financial stability issues,” he has admitted. “They may have separate targets, but their effects are often not entirely independent. So the tools are complementary almost all the time, because financial and macroeconomic stability are deeply intertwined”, he has immediately qualified.
“As they are so intertwined, it is unlikely that there will be an absolute and complete separation of the tools, nor is it possible or desirable”, he continued to refer specifically to the current situation: “Although the financial stability instruments have helped to calm the conditions in the banking sector, developments in that sector, on the other hand, are helping to tighten credit conditions and are likely to weigh on economic growth, hiring and inflation. As a result, our key interest rate may not need to rise as much to meet our targets. Of course, the scope of this is very uncertain ”, he said, always with a few pages in front of him so as not to deviate from the message he wanted to convey.
Powell had already made it clear at the press conference following the meeting of the monetary policy committee on March 22 that the tightening of financial conditions caused by the exchange rate storm could then be interpreted as “the equivalent of a rise in interest rates.” [de 0,25 puntos] or perhaps more than that”, although clarifying that this evaluation could not be made with any precision. Before the Silicon Valley Bank and Signature Bank crisis, the Federal Reserve was expected to raise rates at that meeting by 0.50 points and the rise was only half.
Now, the president of the central bank insists on that message, but emphasizing uncertainty and without making it very clear where monetary policy will go. Yes, he has pointed out that the risk of falling short with rate hikes and the risk of going overboard are beginning to be more balanced. In previous speeches, he had assured that he would rather run the risk of going too far and causing a recession than falling short and inflation becoming entrenched.
“We have come a long way in tightening monetary policy and the policy stance is tight, and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening stemming from recent tensions. banks”, said Powell, who has approved the most aggressive rate hikes since the 1980s, with a cumulative increase of five percentage points in just over a year.
“Having come this far, we can allow ourselves to look at the data and the evolution of the perspectives to make careful evaluations,” he added, always reading the notes he had prepared. The next meeting of the Federal Reserve is held on June 13 and 14 and may be the first in which the official price of money does not become more expensive after 10 consecutive increases.
Powell, however, has said that decisions will be made on a meeting-by-meeting basis and that the only advance guidance he can provide is what data to pay attention to. The most prominent are prices, wages and the labor market.
Halt in debt negotiations
Powell’s attempt at a soft landing has been complicated by the financial storm and now uncertainty about whether Congress will pass a debt ceiling increase in time to allow the US government to continue meeting its obligations. A default on the outstanding debt would have catastrophic economic consequences.
The negotiations seemed to be advancing, but this Friday the representatives of both sides left the meeting slamming the door and accusing the other party of not giving in. The most extremist faction of the Republican Party invites to break off negotiations with the Joe Biden government even if that means non-payment unless it makes massive spending cuts and accepts its conditions.
“We have decided to press the pause button,” said Garrett Graves, one of the Republican representatives, alleging that the negotiations were not being productive.
Treasury Secretary Janet Yellen warned two weeks ago that the X date on which the United States could run out of money to meet its obligations could come as soon as June 1, although leaving open the possibility of a deadline. wider. The debt ceiling, 31.38 trillion dollars, was reached in January and since then the Government has been working with extraordinary measures that have left a temporary respite.
The Council of Economic Advisers of the White House published a report according to which the blockade threat is already having an effect; a default episode, however short, would leave a costly bill, and a prolonged default would drop gross domestic product by 1.5% in the third quarter (at an annualized quarterly rate of 6.1%) and raise the interest rate. unemployment five points, destroying 8.3 million jobs.
.Economy and Business in Facebook and Twitteror in our weekly newsletter
.
., ..
.
