Fed’s Goolsbee Calls for Policy Caution Amid Credit Uncertainty

(Bloomberg) — Federal Reserve Bank of Chicago President Austan Goolsbee said the US central bank should exercise “prudence and patience” in raising interest rates as policymakers assess just how much last month’s banking turmoil will contribute to tighter lending conditions.

“Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious,” Goolsbee said Tuesday in prepared remarks for an Economic Club of Chicago event. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”

Goolsbee, who votes on monetary policy this year and is the Fed’s newest policymaker, is the first official to signal that he may support holding rates where they are at the Fed’s May 2-3 meeting — though he stopped short of explicitly endorsing a pause.

Most Fed officials have emphasized that even amid the uncertainties created by the banking-sector stress, the Fed has more work to do to bring inflation down to its 2% target.

The Chicago Fed chief said that inflation and labor market data came in “surprisingly strong” at the end of 2022 and beginning of this year, but the knock-on effects of the Silicon Valley Bank collapse in March and the resulting financial-market stress may help the Fed in its campaign to cool the economy.

He was careful to say that the Fed should still prioritize its mission to bring down elevated price pressures.

Financial Tightening

Fed officials have been raising rates aggressively for the past year, including four 75 basis-point hikes last year. They had slowed the pace to a half-percentage-point move up in December and then a quarter-point increase in February. They repeated that smaller move at their March meeting, which came less than two weeks after SVB and two other US banks failed.

The Fed reacted quickly to the market turmoil, setting up emergency lending facilities for banks and working with other regulators to provide broad backstops to bank deposits. Markets have “quieted” in recent weeks, Goolsbee said.

But inflation remained stubbornly persistent at the start of the year, which led some Fed officials to voice support for re-accelerating rate increases, perhaps with a 50 basis-point hike in March. The banking problems took that possibility off the table, and Chair Jerome Powell said after last month’s meeting that officials were expecting tighter lending conditions.

Signs are emerging that banks are pulling back on lending, Goolsbee said, helping the Fed.

“We’ve been tightening financial conditions to bring inflation down, so if the response to recent banking problems leads to financial tightening, monetary policy has to do less,” he said.

That contraction could equal somewhere between 25 to 75 basis points of tightening, Goolsbee said, though it’s still too early to know exactly how much.

Goolsbee’s emphasis on watching credit conditions differ from some of his colleagues’ insistence that the Fed still needs to do more to tame prices.

Minneapolis Fed President Neel Kashkari, who also votes on policy this year, said late last month that though it’ll take a while to see the full effects of the banking fallout, the Fed still has more work to do to lower inflation.

New York Fed President John Williams, a permanent voter on the Federal Open Market Committee, said Tuesday at a separate event that one more rate increase is a “reasonable starting place” for officials.

Goolsbee also nodded to the standoff in Congress about raising the country’s debt limit.

“Moments of financial stress are a particularly bad time to take actions that could ignite a financial crisis on their own like, say, defaulting on U.S. Treasuries in a fight over the debt limit,” Goolsbee said.

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