Fed officials say sense of financial stability cleared path for rate
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[March 25, 2023] By
Howard Schneider and Lindsay Dunsmuir
WASHINGTON (Reuters) - Federal Reserve officials on Friday said there
was no indication financial stress was worsening as they gathered at a
policy meeting this week, a fact that allowed them to stay focused on
lowering inflation with another interest rate increase.
In separate appearances, three regional Fed bank presidents said they
ultimately concluded that the March 10 collapse of Silicon Valley Bank
along with other developments did not undermine confidence in the
strength of the U.S. banking system as a whole, with one dismissing the
California-based lender's failure as not relevant to how other banks are
"It was a quirky situation," St. Louis Fed President James Bullard said
in comments to a St. Louis community group.
Speaking to reporters later, Bullard said that "SVB was a very unusual
bank. Different from almost any bank in the country ... The tools we
have deployed will be successful and (the Fed) will end up dealing more
with the strong economy going through the spring and the summer and not
worrying as much as we are right now about financial stress."
In fact, Bullard said he had raised his estimate of how high the Fed's
benchmark overnight interest rate needs to rise by the end of 2023 by a
quarter of a percentage point to the 5.50%-5.75% range, a level that
would require three more quarter-of-a-percentage-point increases from
the 4.75%-5.00% level set by the U.S. central bank this week.
The bulk of Bullard's colleagues see only one more small rate hike as
necessary, while the policy-setting Federal Open Market Committee this
week dropped its guidance that said "ongoing increases" in rates would
likely be necessary.
Other policymakers agreed that, despite an outbreak of global concern
about financial stability over the last two weeks, it appeared there was
no broadening crisis that would require the Fed to recalibrate its
monetary policy and back away from another rate increase - even if the
outlook going forward has become more cautious.
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The U.S. Federal Reserve building is
pictured in Washington, March 18, 2008. REUTERS/Jason Reed/File
'FELT VERY STABLE'
The Fed raised interest rates by a quarter of a percentage point on
Wednesday, its ninth straight increase.
Investors feel that may be the last rate hike, and Fed Chair Jerome
Powell said in his post-meeting news conference on Wednesday that
there was debate about possibly pausing now.
"There was a lot of debate. This wasn't a straightforward decision,"
Atlanta Fed President Raphael Bostic said in an interview with
National Public Radio, a U.S. media outlet.
"At the end of the day, what we decided was that there were clear
signs that the banking system is sound, efforts that the Fed took
with Treasury and the (Federal Deposit Insurance Corporation) to
deal with the difficulties of those banks seem to be working, and
with that as a backdrop, inflation is still too high," Bostic said.
The Fed has a 2% inflation target. Its main indicator of inflation
is currently running at double that pace and proving harder to budge
Bostic said the sudden, catastrophic deposit run at SVB, which had
an unusually large share of deposits above the $250,000 FDIC
insurance limit and at risk of loss in a failure, had "exposed a
real hole in the insurance structure."
U.S. officials eventually decided to make all depositors whole after
judging the situation posed a "systemic risk."
But "that's a different issue than the macro policy issue that we
were dealing with in terms of interest rates," Bostic said. "We were
able to separate those."
Richmond Fed President Thomas Barkin said in an interview with CNN
that the situation in the banking sector "felt very stable by the
time we got there. So the conditions were right to do monetary
policy the way we want to do monetary policy."
"The case for raising was pretty clear."
(Reporting by Howard Schneider; Additional reporting by Michael
Derby and Lindsay Dunsmuir; Editing by Paul Simao)
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