By Howard Schneider
WASHINGTON (Reuters) – The response of U.S. regulators to recent bank stress was strong and fast enough to contain the damage and let Federal Reserve interest rate policy continue to focus on lowering inflation, St. Louis Federal Reserve president James Bullard said on Friday.
Measures like a new Fed bank lending facility were approved in a “swift and appropriate” fashion, Bullard said in a presentation prepared for delivery to the Greater St. Louis Inc. organization.
“Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation,” Bullard said.
Bullard did not indicate in his prepared presentation whether recent financial sector stress has caused him to change his outlook for how high interest rates might need to rise, or whether the Fed should continue raising rates at each policy meeting until it is sure inflation is falling.
Through much of the Fed’s inflation battle, Bullard has been an advocate of “front-loading” rate increases to reach an appropriately “restrictive” level as soon as possible.
The Fed this week approved a quarter point increase and in a statement said a further tightening of monetary policy “may” be needed.
But the projections for a possible endpoint in rate hikes remained at around 5.1%, the same as in December and a level just one more rate increase away from the 4.75% to 5% range approved this week.
The statement also dropped language saying that “ongoing increases” would be necessary. This change puts the timing and extent of the Fed’s next move in doubt as officials assess the fallout from the failure of Silicon Valley Bank and Signature Bank, and broader doubts about the health of the banking system.
Bullard said it was “relatively common” for some financial firms to fail to “adjust their businesses appropriately” as financial conditions change, noting events like the collapse of Continental Illinois bank in 1984 and the 1998 collapse of Long-Term Capital Management.
“These events received considerable attention at the time, but were not ultimately harbingers of poor U.S. macroeconomic performance,” he said.
Meanwhile U.S. growth and the job market continue to outperform, while inflation has come down but “remains too high.”
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)
