Powell Says Credit Crunch Could Mitigate Need For Higher Rate, Bernanke Emphasizes 'It's Different Than 2008'

Zinger Key Points
  • Rates may not need to climb as high as they would otherwise due to credit tightening, Powell said.
  • Bernanke said borrowers are better than in 2008, reducing the economic risk of credit tightening.

Current Fed Chair Jerome Powell and former Fed Chair Ben Bernanke both appeared at the Thomas Laubach Research Conference on Friday, offering monetary policy remarks. 

"Price stability is the cornerstone of an economy" Powell said in his opening comments, adding that the Fed is "strongly committed to returning to the 2% goal." 

"Inflation in non-housing services persists," the Fed chair highlighted. 
Powell suggested that interest rates may not need to climb as high as they would otherwise due to tightening bank lending conditions, but he also said that "banks and the banking system are strong and resilient, and they can deal with these and other challenges in the future."

"As policy has become more restrictive, the risk of doing too much than doing too little is becoming more balanced now", but "we haven't made any decisions yet," the Fed chair stated. 

Market Reactions

Market expectations for a June rate hike plummeted on Friday, after Republican senior debt-ceiling negotiators withdrew from a meeting with White House officials, putting the status of discussions to prevent a U.S. default in jeopardy. Traders currently assign a 15% probability for a June hike, as compared to a 45% probability earlier on Friday.

Treasuries, which are tracked by the iShares U.S. Treasury Bond ETF GOVT, rebounded as yield fell across the board. Stocks flipped to losses, with the SPDR S&P 500 ETF Trust SPY down 0.3%.

Read Also: Markets Quake As GOP Debt Ceiling Negotiators Abruptly Leave Closed-Door Meeting

Fed Responses To US Banking Crisis

According to Bernanke, the current financial crisis caused by Silicon Valley Bank's failure is considered a "classic situation" where assets were exposed to danger, in the case of interest rates. The bank run accelerated because "social-media-savvy consumers" rapidly withdrew their money.

"It ultimately affects credit conditions," but "borrowers are in a much better shape today compared to the past great financial crisis." "That makes a big difference on the impact of consumer spending and the economy in general." 

Further Inflationary Risks Ahead?

Powell said that disinflationary "supply shocks of the past do not appear to be repeated" after the disruptions caused by the pandemic and the conflict in Ukraine. "We don't know whether globalization will be partially or completely reversed," Powell said, adding that "what a central banker can do is control inflation even if supply shocks occur."

Labor Market And Inflation: Relationship Broken?

"The Pandemic scrambled the usual signals between the labor market and inflation," Bernanke said, due to supply shocks and inflation expectations.
Powell indicated that the Fed has been looking at different job market indicators other than the unemployment rate, such as the number of unemployed persons per job opening, to gauge labor market tightness.

Now Read: Markets Quake As GOP Debt Ceiling Negotiators Abruptly Leave Closed-Door Meeting

Photo: Courtesy of International Monetary Fund and  on Flickr

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