On Thursday, three Federal Reserve officials left the door open for additional rate increases intended to lower high inflation.
Concerns with the banking sector may cause enough economic headwinds to help lower price pressures earlier than anticipated, according to two studies.
Fed officials stated that the inflation rate is still too high
The National Association for Business Economics’s meeting was addressed by Susan Collins, president of the Federal Reserve Bank of Boston. Recent indicators support my belief that more work needs to be done to get inflation to the 2% target correlated with price stability, she said.
The official stated that she believed the projection of another 25-basis-point increase this year, which was supported by forecasts from the U.S. central bank released last Wednesday, reasonably balanced the risk that monetary policy will not be restrictive enough to bring inflation down, and the risk that activity will slow by more than necessary to address elevated price pressures.
The emergence of banking system issues triggered by the failure of Silicon Valley Bank and other financial institutions is one important factor relieving some of the pressure on the Fed on the inflation front.
The bank failures shook the financial markets as the Fed prepared for its final policy meeting and forced authorities to increase market liquidity. Additionally, banks drew record sums of emergency cash from the central bank.
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Consistent footing
Collins characterized banks as strong and resilient but added that they are likely to reduce the amount of credit they extend, which will have an impact on overall activity. These changes may partially offset the requirement for further rate increases.
Thomas Barkin, the president of the Richmond Federal Reserve, stated in a speech that the current environment requires nimble monetary policy. In addition, he stated that concerns with the financial sector may speed up the Fed’s goal of returning inflation to 2%. However, he cautioned against making any assumptions about the future.
Collins was positive about the economy in her remarks, but she also made hints about an impending slowdown and noted that a rise in unemployment is probably necessary to help control wage-price inflation.
The motivation for hiring and spending may reflect the fact that policy did not enter fully restrictive territory until the second half of 2022, Collins said that it might be too early to determine the full impact on actual activity. The more underlying strength in the economy than many had anticipated is evident in recent data.
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