US economy could slow down as financial conditions tighten
Al Edwards / Our Today
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Bank collapses, higher inflation, rising interest rates; these are blows to the US economy as the country looks to leave winter behind for spring.
On Wednesday, the Fed raised its benchmark interest rate by a quarter of a percentage point and said further hikes may follow.
It is the ninth increase in a row and the highest it has been since 2007.
“Financial conditions seem to have tightened and probably by more than the traditional indexes say… . The question for us, though, is how significant will that be? What will be the extent of it, and what will be the duration of it?
“We’ll be looking to see how serious is that and does it look like it is going to be sustained. And if it is, it could easily have a significant macroeconomic effect, and we would factor that into our policy decision,” said Jerome Powell, chair of the Federal Reserve.
Depositors across many American banks have looked to the Government for assurance that they can get access to their money in the event of a collapse and will not get burnt. President Joe Biden and Treasury Secretary Janet Yellen have stressed that the utmost will be done to protect depositors.
ASSUME DEPOSITS ARE SAFE
Powell added his voice to calm frayed nerves.
“What I’m saying is you’ve seen that we have the tools to protect depositors when there is a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools. I think depositors should assume that their deposits are safe.”
“It’s too early to say really whether these events have had much of an effect. I do still think though that there’s a pathway to a soft landing. I think that pathway, still exists, and you know, we’re certainly trying to find it.”
Jerome Powell, chair of the Federal Reserve
The question is, will this banking crisis lead to a tightening of lending which will put the brakes on the economy?
“It’s too early to say really whether these events have had much of an effect. I do still think though that there’s a pathway to a soft landing. I think that pathway, still exists, and you know, we’re certainly trying to find it.
“If we need to raise rates higher, we will. I think for now, though…we see the likelihood of credit tightening. We know that can have an effect on the macro economy. Of course we will eventually get to a tight enough policy to bring inflation down to two per cent,” said Powell.
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