Federal Reserve Bank of New York President John Williams said that while the banking sector has stabilized following the second-largest bank collapse in US history, the recent stress may make it more challenging for households and businesses to access credit.
(Bloomberg) — Federal Reserve Bank of New York President John Williams said that while the banking sector has stabilized following the second-largest bank collapse in US history, the recent stress may make it more challenging for households and businesses to access credit.
“The banking system is sound and resilient,” Williams said Wednesday in remarks prepared for an event organized by the Money Marketeers of New York University. “Nonetheless, these developments will likely lead to some tightening in credit conditions for households and businesses, which in turn will weigh on spending.”
‘Too Early’
“It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy,” he said.
The failure of Silicon Valley Bank last month and the resulting market turmoil forced the Fed and other regulators to take emergency action to shore up confidence by providing the wider banking sector with liquidity.
“The use of the discount window and the special program we set up is basically doing exactly what are wanted,” Williams said.
Despite the banking strains, Fed officials lifted interest rates by a quarter point at their March 21-22 meeting, extending their yearlong tightening campaign to quell high inflation.
The move brought the target on their benchmark rate to a range of 4.75% to 5%, up from near zero a year earlier. Projections released at the same time showed officials see interest rates rising to a median of 5.1% by year end, implying one more 25 basis-point rate increase.
Policymakers are expected to raise rates by another quarter point when they meet again on May 2-3, according to pricing in futures contracts.
A report released separately by the Fed on Wednesday showed the US economy stalled in recent weeks, with hiring and inflation slowing and access to credit narrowing after recent banking stress. The Beige Book survey likely reinforces the chances that Fed policymakers will pause their run of interest-rate hikes following the increase expected in May.
Williams also said inflation is too high and officials will use monetary policy to battle that.
“I am confident that we will attain and maintain a sufficiently restrictive stance to bring inflation down to our 2% longer-run goal,” he said, while also noting that inflation has recently moderated and “the most recent data indicate that this trend of slowing inflation is continuing.”
“While there are some indications of gradual cooling in the demand for labor, the labor market remains very tight,” he said.
The New York Fed chief said last week that policymakers’ March forecasts calling for one more interest-rate hike this year, followed by a pause, is a “ reasonable starting place.” However, he emphasized the rate path will depend on incoming economic data.
Fed staff economists forecast a mild recession later this year, minutes of the central bank’s meeting last month showed, but Williams said he was a bit more optimistic.
“I still expect growth to be positive this year, for the fourth quarter to fourth quarter GDP growth, but really modest,” the New York Fed chief later told reporters. “That’s where I come out by balancing an economy that seems to have still good momentum but between the effects of tighter monetary policy here and abroad, and also the likely effects of tighter credit conditions.”
He also said that he sees inflation coming down to about 3.25% this year. The Fed’s preferred gauge of price pressures, the personal consumption expenditures price index, rose 5% in the 12 months through February.
Still, Williams acknowledged that the uncertainty around the outlook was high.
“There’s a lot of factors that tell me the economy is doing better and could even surprise further on the upside,” he said. “And then obviously there’s concerns around risks around tightening credit conditions.”
(Updates with Williams’ remarks to reporters in final five paragraphs.)
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