Powell signals a June pause, says Fed can afford to watch data

FEDERAL Reserve (Fed) chair Jerome Powell said tighter credit conditions stemming from strains in the banking system could mean interest rates don’t have to rise as high as would otherwise be the case.FEDERAL Reserve (Fed) chair Jerome Powell gave a clear signal he is open to pausing interest-rate increases next month and said that tighter credit conditions could mean the policy peak will be lower.

“We’ve come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” Powell told a Fed conference on Friday (May 19) in Washington. “Having come this far we can afford to look at the data and the evolving outlook to make careful assessments,” he added, reading from prepared notes.

Officials raised rates by a quarter percentage point earlier this month to a target range of 5 per cent to 5.25 per cent and signalled they could pause. They next meet Jun 13-14.

“While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” Powell said. “As a result our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain,” he said.

The US central bank has increased interest rates 5 percentage points in little more than a year, undertaking its most aggressive tightening campaign in decades to quell high inflation.

The conference, held at the Fed’s headquarters in Washington, honours the memory of former Fed economist Thomas Laubach, who died in 2020 at the age of 55. BLOOMBERG