On May 19, 2023; Fed Chair Jerome Powell, with Former Chairman Ben Bernanke, gave a lengthy talk on monetary policy and the future of the American financial system. Federal Reserve Chair Jerome Powell said that stresses in the banking sector could mean that “our policy rate may not need to rise as much as it would have otherwise to achieve goals.” This is an indication that the Federal Reserve is considering pausing rates at the next meeting. Speaking at a monetary conference in Washington D.C., the central bank leader noted that Fed initiatives used to deal with problems at mid-sized banks have mostly halted worst-case scenarios from transpiring. He nevertheless noted that the problems at SVB and others could still reverberate through the economy. Jerome Powell went on to state the following:
“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. So as a result, our policy rate may not need to rise as much as it would have otherwise to achieve our goals.”
Furthermore, Powell characterized current Fed policy as “restrictive” and claimed that future decisions would be data-dependent as opposed to being a preset course. Monetary policy in large part has been geared toward cooling a hot labor market in which the current 3.4% unemployment rate is tied for the lowest level since 1953. Inflation by the Fed’s preferred measure is running at 4.6%, well above the 2% long-range goal.
Jerome is clearly looking for a soft landing to avoid a recession at all costs. If the Fed continues to hike rates, it will definitely trigger the recession, and if the Fed reduces interest rates, it might jack up inflation again. It is a tough situation but a course of action must be taken. Pausing interest rates does not mean lowering them. It means that interest rates will remain at the level they currently are, and no more hikes will be added to them. This implies then that the cost of borrowing will remain expensive for investors, companies, and households.
On the other hand, the value of investments may now stabilize but not necessarily increase since rates remain high. In the housing market, mortgage rates will still be expensive; above 6.5%; and interest rates on credit card loans and car loans will still be very expensive for borrowers. On the equity market, however, companies with large market capitalizations may be able to keep borrowing by issuing corporate bonds while companies with smaller market capitalizations will have to restrain the expansion of their operations as access to capital is still pricey. The labor market is extremely resilient. While we may continue to see a slowdown in the economy, this slowdown will not dramatically affect the labor market as more jobs are added to the economy.