Federal Reserve Bank of New York President John Williams rejected the idea that the central bank’s aggressive interest-rate increases precipitated recent financial strains highlighted by recent banking failures.
“I personally don’t think it was the case that the pace of rate increases was really behind the issues at the two banks back in March,” he said Monday during a moderated discussion organized by the Economics Review at New York University. “I think it’s well understood there were some pretty idiosyncratic specific issues with those institutions.”
Silicon Valley Bank’s collapse last month was the second largest in U.S. history. SVB and Signature Bank were taken over by regulators after a run on their deposits.
Fed officials lifted interest rates by a quarter percentage point last month, bringing their policy benchmark to a target range of 4.75% to 5%, up from near zero a year earlier.
Officials are trying to assess how much the recent banking turmoil might make credit scarcer, a shift that could slow the economy.
“You’ve seen that in the past where credit conditions may tighten somewhat,” Williams said, noting that this could affect spending and employment. “We don’t really know whether this will happen this time. We haven’t seen any clear signs yet of credit conditions tightening and we don’t know how big those effects will be.”
A report released earlier Monday by the New York Fed shows consumers are becoming more pessimistic about their ability to tap credit. The share of U.S. households saying it is harder to obtain credit rose last month to the highest since the bank’s survey of consumer expectations was started nearly 10 years ago.
Fed officials are raising rates aggressively to curb high inflation and forecasts last month showed the 18 officials expected rates to reach 5.1% by year-end, according to their median projection. That implies one more quarter-point hike. Investors bet the Fed will make that move at its next meeting on May 2-3, but will cut rates later this year — something officials don’t see, according to their forecasts.
Williams played down the significance of market expectations for policymakers.
“In the end, I don’t worry too much especially about market expectations well off into the future, because it could be that there’s different views of how the economy may perform,” he said. “At the end of the day we need to make the decisions we think are the right ones to achieve our goals of maximum employment and price stability.”
