Fed official: ‘We have to be careful’ about raising interest rates after bank failure

A Federal Reserve official said the central bank should be cautious about raising interest rates so it can assess the fallout from stress in the banking sector triggered by the collapse of two mid-sized banks last month.

“In moments like this of financial stress, the right monetary approach requires caution and patience,” Chicago Fed President Austan Goolsbee said in a speech prepared for delivery Tuesday to the Economic Club of Chicago.

Mr. Goolsbee became Chicago Fed president in January and voted for quarter-point increases in the benchmark federal funds rate at the central bank’s two meetings this year, most recently in March to a range between 4.75% and 5%. But his speech on Tuesday did not include explicit support for further increases.

Over the past year, the Fed has raised interest rates at its fastest pace since the early 1[ads1]980s to counter inflation, which jumped to a 40-year high last year. The Fed raises interest rates to fight inflation by slowing the economy through tighter financial conditions, such as higher borrowing costs, lower stock prices and a stronger dollar, which dampens demand.

Regulators had moved aggressively to bolster confidence in the banking system after a run on Silicon Valley Bank forced them to close the bank on March 10 and another lender, Signature Bank, on March 12.

Mr. Goolsbee said bank lending surveys showed lenders were already tightening lending standards before the two banks failed last month. He said he would rely heavily on surveys and other anecdotal data on lending conditions to help decide how to set policy in the weeks ahead.

“Given how much uncertainty abounds about where these economic headwinds are going, I think we have to be careful,” he said. “We should collect additional data and be cautious about raising rates too aggressively until we see how much work the headwinds are doing for us to bring inflation down.”

Mr. Goolsbee said he saw no tension between the Fed’s efforts to slow the economy to fight inflation and its efforts to maintain a strong and stable banking system. But economic stress, even without going into a full-blown crisis, can still slow the economy by reducing the availability of loans and other credit to households and businesses, he said.

“I don’t think … we should stop prioritizing the fight against inflation” because of stress in the financial system, he said. “But we must also recognize that this combination may affect certain sectors or regions in a way that looks different than if monetary policy acted on its own.”

Separately, New York Fed President John Williams said officials were watching credit and banking conditions very closely, but he said there were no signs yet that business or consumer spending was strongly affected by changing lending standards.

Another important consideration will be whether Fed officials “really see signs of this underlying inflation coming down,” Williams told Yahoo Finance.

Fed officials have their next meeting in early May. Mr. Williams, a top ally of Fed Chairman Jerome Powell, pointed to the median of 18 officials’ estimates of interest rates submitted at their meeting last month. They showed that policymakers “may expect another rate hike,” he said.

Last week’s March hiring report showed demand for labor remains strong and inflation “is still very high,” Williams said. A measure of service prices that excludes energy and housing costs, which officials believe captures underlying price pressures, “hasn’t caught up yet,” he said.

Write to Nick Timiraos at

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